Banking Activities and Local Output Growth: Does Distance from Centre Matter?

Abstract

Özyıldırım S. and Önder Z. Banking activities and local output growth: does distance from centre matter? Regional Studies. In this paper the relation between local banking activities and local output growth is empirically studied in Turkey during the period 1991–2000. Although there is no legal restriction against regional banking, the banking sector is spatially concentrated in Turkey. In this institutional structure, the distance between headquarters and the local branches is argued to affect the role of financial intermediation in the development of provincial prosperity. Empirical findings suggest that banking activities have a significant positive impact on the per capita local output growth of regions, especially on those that are distant from the financial centre. However, when bank loans are adjusted to the size of the local economy (provincial gross domestic product, GDP), the relation between banking activities and the output per capita is found to be negative, suggesting that these loans are used to finance unprofitable and unproductive projects in distant provinces.

Özyıldırım S. et Önder Z. Les activités bancaires et la croissance de la production locale: la distance du centre, importe-t-elle? Regional Studies. Cet article cherche à étudier empiriquement pour la Turquie le rapport entre les activités bancaires et la croissance de la production locale entre 1991 et l'an 2000. Bien que il n'y ait aucun obstacle juridique aux opérations bancaires régionales en Turquie, le secteur bancaire est concentré géographiqement. Vu cette structure institutionnelle, on affirme que la distance entre le siège social et les agences locales influe sur le rôle de l'intermédiation financière dans le développement de la prospérité régionale. Les preuves empiriques laissent supposer que les activités bancaires ont un impact positif non-négligeable sur la croissance de la production locale par tête des régions, notamment sur celles qui sont loin du noyau financier. Cependant, une fois ajusté les prêts bancaires pour tenir compte de la taille de l’économie locale (PIB régional), le rapport entre les activités bancaires et la production par tête s'avère négatif, ce qui laisse supposer que ces prêts servent à financer des projets non rentables et improductifs lancés dans des régions lointaines.

Croissance locale Activités bancaires Distance Noyau financier

Özyıldırım S. und Önder Z. Bankaktivitäten und lokales Produktionswachstum: Spielt die Entfernung vom Zentrum eine Rolle? Regional Studies. In diesem Beitrag wird der Zusammenhang zwischen lokalen Bankaktivitäten und lokalem Produktionswachstum in der Türkei im Zeitraum von 1991 bis 2000 empirisch untersucht. Obwohl das regionale Bankwesen in der Türkei keiner gesetzlichen Einschränkung unterliegt, ist der Banksektor räumlich konzentriert. In dieser institutionellen Struktur wirkt sich die Entfernung zwischen der Zentrale und den Filialen nach unserer Argumentation auf die finanzielle Vermittlungsrolle bei der Entwicklung des Wohlstands in den Provinzen aus. Die empirischen Ergebnisse lassen darauf schließen, dass sich die Bankaktivitäten deutlich positiv auf das Wachstum der lokalen Pro-Kopf-Produktion in den Regionen auswirken, insbesondere in Regionen, die weit entfernt vom Finanzzentrum liegen. Wenn wir jedoch die Bankdarlehen an die Größe der lokalen Wirtschaft anpassen (BIP in der Provinz), erweist sich die Beziehung zwischen den Bankaktivitäten und der Pro-Kopf-Produktion als negativ, was darauf schließen lässt, dass diese Darlehen in abgelegenen Provinzen zur Finanzierung von unrentablen und unproduktiven Projekten genutzt werden.

Lokales Wachstum Bankaktivitäten Entfernung Finanzzentrum

Özyıldırım S. y Önder Z. Actividades bancarias y crecimiento económico local: ¿Es importante la distancia del centro? Regional Studies. En este artículo analizamos empíricamente la relación entre las actividades bancarias y el crecimiento económico a nivel local en Turquía durante el periodo de 1991 a 2000. Aunque no existe una limitación legal contra la banca regional, en Turquía el sector bancario está concentrado espacialmente. Según nuestra argumentación, en esta estructura institucional la distancia entre las sedes centrales y las sucursales locales afecta al rol de la intermediación financiera en el desarrollo de la prosperidad provincial. Los resultados empíricos indican que las actividades bancarias tienen una influencia muy positiva en el crecimiento económico local per cápita en las regiones, especialmente en las que están más alejadas del centro financiero. Sin embargo, cuando ajustamos los préstamos bancarios al tamaño de la economía local (PIB provincial), observamos que la relación entre las actividades bancarias y el rendimiento per cápita es negativa lo que sugiere que estos préstamos se utilizan para financiar proyectos no rentables e improductivos.

Crecimiento local Actividades bancarias Distancia Centro financiero

Keywords:

• Local growth
• Banking activities
• Distance
• Financial centre

Notes

1. The direction of the causality between financial intermediation and growth has been debated for a long time. Taking one side of this argument, Schumpeter (1962) claimed that financial systems are important for growth and that the economies with more efficient financial systems grow faster. Alternatively, Robinson (1952) stated that economies with good growth prospects need financial institutions for the provision of funds. Hence, first, the economy grows. Then, financial institutions develop. For a detailed survey, see Levine (1997).

2. This is called the Cyert, March and Simon model of decision making. It is the organizational analogue of the bounded rationality approach at the individual level.

3. The Turkish banking system is highly centralized, similar to Australia, Canada, and Chile (Porteous, 1995), and Hungary (Gal, 2005).

4. For example, in 2000, bank deposits were 179%, 128% and 69% of the GDP in the UK, Germany and France, respectively. The bank credits-to-GDP ratios were higher than their deposit-to-GDP ratios; 185%, 167% and 93% in these countries. Moreover, bank assets were 3.82, 3.49, and 2.52 times higher than their GDPs in the UK, Germany and France in 2000. These figures are calculated using the statistics obtained from the European Banking Federation (2000).

5. These figures are calculated using the data from the World Bank World Development Indicators (GDP) and the Turkish Banking Association (total assets, deposits and credits).

6. In addition to deposit banks, there are five special finance houses (SFHs) that are allowed to collect funds and to grant credit in Turkey. Unlike deposit banks, they do not provide interest to the depositors as a return, but they distribute positive or negative returns that they get from the investment of these funds. SFHs operate as Islamic banks in Turkey. In 1995, their shares in assets, deposits and credits in the banking sector were only 1.87%, 2.43% and 3.46% respectively. However, their shares have increased slightly: 2.1%, 2.6% and 4.8% in 2000. Because of the unavailability of provincial data about their activities, their impact on local development is not analyzed in the current study.

7. Source: European Banking Federation website, General Statistics on the European Financial Sector as of 31 December 2000 (http://www.fbe.be).

8. The mean GDP per capita was $3490 in the Marmara region and $280.5 in the Eastern Anatolia region during the period 1991–2000.

9. This method assumes that explanatory variables are weakly endogenous, i.e. they can be affected from the past and current realization of the growth rate, but future unanticipated shocks to growth do not affect the current banking activity. For a detailed explanation of this estimation, see for example, Levine et al. (2000).

10. Unfortunately, the data on interest rates are not available. We assume that interest rates were different across regions and banks offer different interest rates depending on the riskiness of borrowers. If there is no difference in regional interest rates, those who borrow from the regions with high inflation rates will experience lower real interest rates. We would like to thank the anonymous referee for pointing out this issue.

11. For example, Igdir and Ardahan were districts of Kars and became provinces in 1993. The GDP figure for Kars in 1992 included the GDP generated from these two districts (in terms of 1987 prices, it is 228 076 million TL), but the 1993 GDP did not include these new provinces and declined to 170 275 million TL, whereas the GDPs in Ardahan and Igdir were 46 485 and 59 085 million TL. The alternative to the exclusion of old (mother) provinces from the sample is to calculate the true GDP figures for the old province by adding the GDPs of the new provinces. However, Ardahan and Igdir were exceptions, because they were formed from one city. Most of the new provinces were formed as villages or districts from at least two cities.

12. Our instruments are valid, and our GMM estimator is consistent, because the second-order serial correlations in error terms are low, and we fail to reject the over-identification restriction with the Sargan test (χ²).

13. State banks carry large amounts of non-performing loans arising from these operations and the stock of these loans was about $12 billion in 1998, almost 5% of Turkey's GDP (Denizer et al., 2000).