Bank Privatization WD Egypt

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www.elsevier.com/locate/worlddev
World Development Vol. xx, No. x, pp. xxxxxx, 2007 2007 Published by Elsevier Ltd. 0305-750X/$ - see front matter
doi:10.1016/j.worlddev.2006.07.002
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Privatization, State Ownership, and Bank Performance in Egypt
Summary. In this study, we address the nancial and operating performance of a sample of 12 Egyptian banks from 1996 to 1999, during which time control was transferred from the state to the private sector. Following privatization, the results indicate that some protability and liquidity ratios for privatized banks decline signicantly, but other performance measures are virtually unchanged. Antithetically, the results indicate that the relative performance changes of privatized banks were better than those of mixed banks with majority state ownership but worse than those of banks with other ownership forms (private, state-owned, and mixed private ownership). However, the study nds a strong evidence to support the theory and previous empirical ndings that banks with greater private ownership perform better. 2007 Published by Elsevier Ltd. JEL classication G21, G32, L33 Key words state ownership, banks, privatization, nancial performance, MENA, Egypt
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MOHAMMED OMRAN * Arab Academy for Science and Technology, Alexandria, Egypt Middle East and Central Asia Department, Washington, DC, USA
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1. INTRODUCTION In many developing countries where banks are still state controlled, we see that the inecient and often politically motivated use of the banking sector eventually frustrates eorts toward achieving economic development. Unlike the impact of privatization on the nancial and operating performance of non-nancial state-owned enterprises (SOEs), which has been extensively studied, the impact of bank privatization has been insuciently researched. As we will see in Section 3, the theoretical and empirical work conducted thus far on bank privatization has been limited. Little is known about the bank privatization process and what is known comes mainly from transitional economies and Latin American countries. The literature is limited on this issue in other regions such as the Middle East and North Africa (MENA), although there are some studies on the impact of privatization on the performance of non-nancial rms in Egypt (Omran, 2004a, 2004b, 2005). As such, we believe that a study on bank privatization in a MENA country is very important for researchers and policy makers in this region.
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As is the case in many emerging markets, banks in Egypt are the dominant nancial institutionsthey control most of the money ow and possess most of the nancial assets. Consequently, the issue of bank privatization is important to the Egyptian economy, in particular because there is an ongoing discussion about the quality of Egypts bank loans, investment portfolios, and suciency of reserves. Since the economics of privatization is a broad topic, we had to limit the scope of our investigation. 1 We intend to focus only on examining whether privatization improves the bank performance and thus, if any of the benets of privatization predicted by economic theory are achieved. If transferring control from the state to the private sector aects performance, we expect to see changes in various accounting measures for these privatized banks. More precisely, (i) we examine how banks perform post-privatization versus pre* The author gratefully acknowledges Miss Ayten Feteheldin at the Economic Policy Institute of the Arab Monetary Fund for her excellent research assistance. Final revision accepted: July 14, 2006.
Please cite this article in press as: Omran, M. , Privatization, State Ownership, and ..., World Development (2007), doi:10.1016/j.worlddev.2006.07.002
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privatization (on an unadjusted basis); (ii) we test the performance changes in privatized banks on a matched adjusted basis privateowned banks (PVBs), state-owned banks (STBs), and combined-ownership banks with majority private ownership banks (MPVBs) or majority state-ownership banks (MSTBs) which allows us to examine the performance changes irrespective of any industrywide factors that may aect performance; and (iii) we also explore the post-privatization performance of privatized banks, not performance changes, versus other group counterparts. We then complement the ndings of this comparison by employing several xed-eect regressions over the entire study period to capture the impact of ownership structure on bank performance for all banks. By providing an extensive analysis on all banks, we should be able to draw the policy makers attention to the impact of ownership structure on bank performance and to provide them with adequate information to help them decide whether they should go further in the bank privatization process. Using a sample of 12 Egyptian joint-venture banks (JVBs) that were fully or partially privatized from 1996 to 1999, the results indicate that some protability and liquidity ratios declined signicantly, whereas other performance measures asset quality, capital risk indicators, operating eciency, and asset growth show insignicant changes. At the same time, the relative performance changes of privatized banks compared to matched adjusted PVBs and MPVBs indicate similar results. This is pervasive particularly for protability and eciency indicators. Using MSTBs and STBs as benchmarks, we document that the relative performance changes of privatized banks are better than MSTBs and worse than STBs. Nevertheless, the results from post-privatization and the entire study period provide a strong evidence that banks with higher private ownership involvement are associated with a better performance. The remainder of the paper is organized into six sections. Section 2 provides a background on the bank privatization process in Egypt. Section 3 provides a summary of bank privatization literature and the main ndings of the previous studies. The sample construction is described in Section 4, and in Section 5 the performance measures and methodology used in this study are introduced and explained. The results are presented and discussed in Section 6. Section 7 concludes the paper.
2. BACKGROUND OF THE BANK PRIVATIZATION PROCESS IN EGYPT Although the nancial services sector in Egypt is not as integrated as in developed markets, it is relatively promising. Banking reform has become a critical element of the economic reform program introduced in 1990 and the Egyptian banking system has since entered yet another phase of development. The reform program involved the nancial sector in several ways, beginning with the elimination of the repressive measures that had been in practice since the early 1960s. Loan and deposit rates were liberalized in January 1991, followed by the removal of ceilings on bank loans to the private sector in October 1992. Also, service fees and bank charges were freed up; the reserve requirement ratio was reduced; and majority foreign ownership was permitted. However, despite these advances, there is, as yet, no single institution that oers a full range of nancial products to its customers. The banking sector in Egypt incorporates 28 commercial banks registered with the central bank of Egypt (CBE): four state-owned banks and 24 private and JVBs. As for non-commercial banks, they are segmented into business and investment banks (whose main activities are, surprisingly, the same as those of commercial banks) and specialized banks. There are 31 banks of the former and only three of the latter, for a total of 34 non-commercial banks as of 2002. The privatization program in Egypt began in 1991 as part of the countrys economic reform program. Egypts 314 SOEs (non-nancial rms) were grouped under 27 holding companies (reduced to 14 by 2001). Under the governments strategy for the divestment of SOEs, three approaches were initially undertaken. The rst was to sell shares through the domestic stock market, the second was to sell strategic stakes of shares to anchor investors through public auction, and the third was to sell rms to employee shareholder associations. In addition, some rms were liquidated because they were deemed not economically viable due to their enormous debt burdens. 2 The number of Egyptian privatized rms, classied by industry and method of sale, is given in the Appendix. With regard to the banking sector, the government controlled 30 banks: 23 JVBs; in which the state held at least a 51% share, and seven STBs (four are commercial banks and three
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PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT
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3. LITERATURE REVIEW ON BANK PRIVATIZATION
As mentioned previously, in the past few years a moderate amount of theoretical and empirical work on bank privatization has emerged. We observe that all work on this topic has addressed (i) transactional structures and the technical process of bank privatizations, (ii) post-privatization performance of privatized banks, or (iii) both issues together. Meyendor and Snyder (1997) examine the transactional structures of privatization in three monobanks from Central Europe and Russia. They nd that these governments are not working seriously toward breaking up the
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are specialized banks). Starting in 1994, in an attempt to reduce market concentration and enhance competition, the Egyptian government embarked on an active bank privatization programas one element of economic reform. The privatization program consists of two separate branches, the privatization of JVBs and the privatization of STBs. With regard to JVB privatization, in 1994 the government issued directives to the four stateowned banks to sell their holdings in 23 JVBs, or at least reduce their holdings to less than 51%. However, no major activity occurred until early 1996, when the government approved amendments to the banking and credit law, lifting the 49% limitation on foreign ownership of an Egyptian JVB. Following that, 14 JVBs were either partially or fully privatized. However, in 1999 the bank privatization process stalled as several factors contributed to the apparent lack of enthusiasm for selling of JVB shares (among these factors were the stock markets lackluster performance and the change in the income tax code of 1998, which eliminated the ability of banks to earn tax-free income on government securities. This resulted in a signicant decline in bank protability and hence reduced the attractiveness of the banking sector as a whole). Although some JVB privatizations were successful, to date there have been no successful STB sales. In early 1997, the government agreed with the IMF to privatize one of the four state-owned commercial banks before the end of that year. However, until mid-2005, there had been no announcement regarding which bank would be privatized or how it would be sold. 3
socialistic monobank system as the states in this region still control monobanks. The paper argues that various transactional structures could have signicant eects on a banks microstructure, strategy, and post-privatization performance. In another study, Unal and Navarro (1999) thoroughly examine the technical process of bank privatization in Mexico and provide a detailed explanation of this process. They argue that the lack of a previously enhanced legal and regulatory framework is a major obstacle in the full achievement of bank privatization objectives set by the government, so there is a need to build a better regulatory and supervisory environment long before the privatization process starts. Abarbanell and Bonin (1997), Bonin and Wachtel (1999), Hasan and Marton (2003), and Bonin, Hasan, and Wachtel (2005a) provide evidence that bank privatization is dicult to achieve in transition economies. However, the latter two papers along with another paper by the same authors, Bonin, Hasan, and Wachtel (2005b) indicate that banks with a greater foreign ownership involvement are associated with a higher eciency. These facts provide strong evidence that ownership structure really matters in banking. The private banks in these studies are found to be more ecient than their state-owned-counterparts, and the gap increases when private banks are controlled by foreign ownership. In the pertinent research on Latin America, we nd that studies by Clarke and Cull (1999a, 1999b) on bank privatization in Argentina are very well executed. In one paper (1999a), they analyze the pre- and post-privatization performance of publicly owned Argentinean provincial banks and show that privatized provincial banks operated quite differently from public provincial banks, yet similar to the 10 largest established private banks. In contrast to the successful bank privatization in Argentina, Markler (2000) identies some factors that have impeded Brazils attempts to privatize its state-owned banks. Among these factors are the collapse and acquisition of private banks, foreign participation, and globally oriented nancial markets. The empirical works on bank privatization in developed countries tend to be, however, limited. For a group of six Italian privatized banks, Farabullini and Hester (2001) nd positive changes in the organizational structure and protability in the post-privatization period of
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the sample banks. Last, Verbrugge, Megginson, and Owens (1999) investigate the performance of bank privatization in 25 developed and emerging economies and they document limited post-privatization improvement in bank performance. Additionally, they argue that substantial state ownership remains after privatization in most privatized banks, which raises serious problems for establishing market-oriented systems. Recently, a special issue of the Journal of Banking and Finance (2005) on bank privatization and a new book by Megginson (2005a, 2005b) shed light on several empirical works on bank privatization. Among these papers, Megginson in his survey paper (2005a) and book (2005b) concludes that although privatization generally improves the performance of nancial rms, the improvement is less than that observed in the studies of non-nancial rms. Also the author nds that foreign ownership involvement produces a positive impact on bank performance. Clarke, Cull, and Shirley (2005) conclude that gains are greater from bank privatization when the government gives up control and does not restrict competition, when banks are sold to strategic investors, and when foreign banks are allowed to participate in the privatization process. Many papers show the same results where ownership structure matters in determining the outcomes of bank performance (see e.g., Berger, Clarke, Cull, Klapper, & Udell, 2005; Boubakri, Cosset, Fischer, & Guedhami, 2005; Nakane & Weintraub, 2005; Otchere, 2005; Williams & Nguyen, 2005). From the aforementioned literature and other studies not mentioned here, we nd that most bank privatization studies have focused chiey on transition economies in Latin America, and some Asian countries. The aim of our paper is to ll this gap by studying a country in the MENA region, a part of the world that is considerably understudied in the area of nancial economics. This is what we address next. 4. SAMPLE CONSTRUCTION
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at least 2 years of post-privatization data to measure performance changes. As seen in Tables 1 and 2, we were able to identify 14 privatization processes for JVBs. However, we excluded two banks: one because its state ownership is still above 50%, and the other because we were not able to nd sucient pre-privatization data. Therefore, the nal sample consists of 12 JVBs, 11 of which are commercial banks. Out of these privatized banks, the state owns 20% or less in only four banks, and only one bank is 100% privately owned. We also identify the sub-samples of benchmark banks that were not involved in the privatization process to serve as benchmarks. These benchmarks are ve PVBs, 4 six combinedownership banks with a private majority (MPVBs), 5 eight combined-ownership banks with a state majority (MSTBs), 6 and the four big state-owned commercial banks (STBs). 7 The accounting data of the sample privatized banks and their group counterparts are drawn from the nancial information provided by the Kompass Egypt Financial Year Books (Fiani and Partners, various issues). This rich source of nancial information displays the nancial statements of respective banks in Egypt in a consistent manner so that selected performance measures are on a comparable basis, following international accounting standards (IAS).
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5. PERFORMANCE MEASURES AND METHODOLOGY (a) Performance measures
This study examines the performance of a sample of Egyptian JVBs from 1996 to 1999, during which time control was transferred from the state to the private sector. We dene bank privatization by a transfer of ownership that reduces the states share to less than 50%. The sample period ends in 1999 because we needed
The methodology used in this paper incorporates many accounting performance measures to allow for comparison of pre- and post-privatization performance. It is well-documented theoretically and empirically that transferring ownership from the public to the private sector should lead to an increase in protability as private management would show a greater concern for prots compared to public management. Also, it is expected that privatization should provide a better allocation of resourceswhether nancial, human, or technologicalso that there is a better chance that the new management will be able to meet regulated standards, improve asset quality, and improve operating eciency. The measures we use to check for the above-mentioned propositions are mostly those from Cornett, Ors, and Tehranian (2002), in addition to some from Verb-
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Banks
Alexandria Comm. & Mar. Bank Bank du Caire et de Paris Cairo Barclays Bank Commercial International Bank Credit Internationale dEgypte Egyptian American Banka Egyptian Commercial Bank Export Development Banka Misr Exterior Bank Misr International Bank Misr Romania Bank National Bank for Development Nationale Societe Generale Suez Canal Bank*
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Table 1. Details of JVB privatization oers (199699) Oer size As, % No. of shares (000s) 27 27 11 25 11.5 20 10 24 39 20 18 26 10.5 34 300 7 55 16,250 577 2,400 963 600 2,847 4,500 900 5,200 1,050 3,400 No. of shares listed (000s) Market capitalization Total assets ($ 000s) ($ 000s) 1,125 26 500 65,000 5,109 12,000 9,626 2,500 7,300 22,500 5,000 20,000 10,000 10,000 64,714 68,451 206,490 733,791 76,109 460,177 114,092 300,147 324,012 667,965 n.a. 48,600 133,038 235,841 1,093,587 1,173,412 2,890,335 13,277,290 920,558 5,307,541 1,945,184 2,500,475 5,422,964 8,979,760 1,563,443 6,205,061 3,079,483 7,370,071
Date of privatization
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1997 1997 1999 1998 1996 1997 1999 1996 1997 1997 1998 1998 1997 1997
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The table shows the privatization transactions of the privatized JVBs from 1996 to 1999. For each bank, we provide the date of privatization, the oer size, the number of shares listed, the market capitalization, and the market value of the total assets, where applicable. a The reduction in state ownership was achieved via increases in capitalization by the private sector.
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Bank
Ownership
Year* T 1, % T, % T + 1, % T + 2, % T + 3, % T + 4, %
The table provides detailed information regarding the ownership structure of privatized banks. For each bank, we provide the ownership prior to the privatization date, on the privatization date, and in the post-privatization period, year by year, up to 4 years. We divided the ownership into three main categories, state-, foreign-, and privateownership. * T refers to the year of privatization, T 1 refers to the year preceding privatization, and T + 1, T + 2, and T + 3 refer to 1, 2, and 3 years following privatization, respectively.
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Alexandria Comm. & Mar. Bank State Private Bank du Caire et de Paris State Foreign Private Cairo Barclays Bank State Foreign Commercial International Bank State Foreign Private Credit Internationale dEgypte State Foreign Private Egyptian American Bank State Foreign Private Egyptian Commercial Bank State Foreign Private Export Development Bank State Private Misr Exterior Bank State Private Misr International Bank State Foreign Private Misr Romania Bank State Foreign Private National Bank for Development State Private Nationale Societe Generale State Foreign Private Suez Canal Bank State Foreign Private
95 5 51 49 0 51 49 80 5 15 51 39.5 9.5 51 41 8 35 40 25 100 0 59 41 63 37 0 51 49 0 62 38 51 49 0 64 36 0
62 38 22 76 2 40 60 45 30 25 40 51 10 35 41 24 25 40 35 76 24 20 80 43 37 20 33 49 18 34 66 36 51 13 48 40 12
59 42 22 76 2 40 60 45 30 25 19.5 69.5 11 35 41 24 13 40 57 76 24 20 80 43 37 20 33 49 18 34 66 25 53 22 48 40 12
53 47 22 76 2 40 60 25 45 30 19.5 69.5 11 35 41 24 13 40 57 76 24 20 80 36 37 27 33 49 18 23 77 25 53 22 11 36 53
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rugge et al. (1999). More precisely, to identify our sample banks performance changes following their privatization dates, we evaluate the following six common performance indicators: (i) Protabilityindicates overall performance, and is measured by two proxies: return on assets (ROA) and return on equity
(ROE), which refer to income after taxes as a percentage of book value of total assets and total equity, respectively. (ii) Asset qualityindicates the banks loan quality and risk, and is determined by loan losses to loan that refers to charge-os and allowances for loan losses as a percentage of total loans and leases.
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(b) Methodology We carry out the empirical tests as follows: (i) To examine how privatized banks perform in the post-privatization period versus pre-privatization (on an unadjusted basis), we calculate the mean prior to and after the date of privatization for each privatized bank, excluding the year of privatization (year 0). 8 Therefore, the minimum time interval data for each bank is 5 years (from at least year 2 to year +2). Having done that, we test the null hypothesis that the cross-sectional average performance changes are equal to zero for a sample of n privatized JVBs. Since the sample size is small (only 12 banks) and some performance measures are not normally distributed, we also employ the non-parametric Wilcoxon signed-rank test to test the null hypothesis that the median performance changes are equal to zero. (ii) To examine performance changes of privatized bank irrespective of any industrywide factors that might be aecting performance, we matched our sample privatized banks to different control groups of banks (PVBs, MPVBs, MSTBs, and STBs). As Barber and Lyon
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(iii) Capital riskreects the ability of a bank to extend loans while meeting regulated capital standards and is measured by two proxies: core capital to assets and loans to total capital (x), which refer to total shareholders equity as a percentage of book value of total assets and total loans as a percentage of book value of total equity, respectively. (iv) Operating eciencyreects the banks ability to generate revenue and pay expenses and is measured by three proxies: net interest margin, non-interest revenue production, and return on loans, which refers to interest expenses minus interest revenues as a percentage of total assets, non-interest income as a percentage of total assets, and interest and fees on loans to total loans and leases, respectively. (v) Liquidity riskindicates the cash position of the bank and is measured by investment securities to total assets, which refers to the book value of total investment securities as a percentage of book value of total assets. (vi) Growthreects the banks change in assets and is measured by the asset growth rate, which is the change in the book value of total assets as a percentage of book value of total assets in the previous year.
RPC i P i;t P i;t1 =P i;t1
P benchmark;t P benchmark;t1 =P benchmark;t1
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(1996) indicate, matching sample rms to control rms based on industry, size, and past performance will lead to well-specied test statistics. We decided to test the adjusted performance methodology based on several specications to overcome the problem of the varying sizes of each group and, to some extent, the industry dierences. 9 As we did for privatized banks, we also compute the mean values of each bank in the four group counterparts, identied previously, prior to and after the privatization date of each JVB. 10 To overcome the problem of the dierences in pre-privatization performance between privatized banks and their group counterparts, we adjusted the data to ensure that such comparisons are valid by calculating the relative performance changes (which refers to the proportional performance changes of a privatized bank minus the proportional performance changes of each group of benchmark banks) as follows: 11
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where RPCi is the relative performance change for bank i, Pi,t is the mean performance for bank i in the post-privatization period, Pi,t1 is the mean performance for bank i in the pre-privatization period, Pbenchmark,t is the mean performance of the benchmark group of banks in the post-privatization period, and Pbenchmark,t1 is the mean performance of the benchmark group of banks in the pre-privatization period. Having computed the RPC for each performance measure and each bank, we again employ the parametric and the non-parametric test statistics just mentioned. In other words, we compare the proportional performance changes of privatized rms against the proportional performance changes of each group of benchmark banks. (iii) To examine whether there are any significant dierences in performance, not performance changes, among banks according to their ownership structure, we compare the post-privatization performance of privatized banks,not performance changes, versus each group of benchmark banks. We then complement the ndings of this comparison by employing several xed-eects regressions over the entire study period for all banks to capture the impact of ownership structure on bank performance. This, in fact, could shed light on which ownership structure performs better
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516 regardless of the performance changes between 517 the pre- and post-privatization period. 518 519 520 521 522 523 524 525 526 527 528 6. RESULTS In this section, we attempt to examine whether privatized banks are more protable and ecient in the post-privatization period. We deal with this issue at three dierent levels: (i) unadjusted results, (ii) matched adjusted results, and (iii) post-privatization comparison between privatized banks and the dierent group counterparts. We then complement that by examining the impact of ownership structure on bank performance over the entire study period.
(b) Pre- versus post-privatization performance of 567 568 privatized banks (unadjusted basis) The question now is: Are the changes in performance measures of privatized banks due to new ownership structures? Or are they attributable to external factors other than privatization? To account for the impact of contemporaneous events, we also report matched adjusted performance measures in Tables 4 and 5. As we can see from Table 4, compared with private-owned and majority PVBs, it is remarkable that the relative performance changes of ROA and ROE for privatized banks are substantially lower than those of PVBs and MPVBs at the 1% and the 10% level of signicance for the rst ratio, and at the 1% level for the latter. We also notice that none of our sample-privatized banks outperforms its bank counterpart in terms of ROE, while only 33% of privatized banks exceed the MPVBs in terms of ROA. With these results in mind, we do not see any improvement in the asset quality indicator as the slight better relative performance changes of privatized banks compared to PVBs and MPVBs are not signicant. As for capital risk indicators, it seems that privatized banks improve their core capital to assets ratio relative to their matched banks, although not signicant relative to PVBs but signicant at the 10% level relative to MPVBs. 12 However, the relative change in loans to total capital of privatized banks is not signicantly dierent from their counterparts at any level. As for operating eciency, we conclude that apart from net interest margin (NIM)the relative performance changes of non-interest revenues and return on loans of privatized banks decline compared with their bank counterparts, although signicantly only for the rst ratio compared to PVBs. While the relative performance change in the liquidity indicator improves for privatized banks compared with both PVBs and MPVBs at the 10% level. Lastly, we nd no signicant dierence in relative performance change in the asset growth rate between our sample privatized banks and their counterparts. We could, however, draw some conclusions from the above analysismost importantly, the relative performance changes of privatized banks lag behind their bank counterparts (PVBs and MPVBs), particularly in terms of protability and some eciency ratios. Nevertheless, since we compare the relative performance changes of 569 570 571 572 573 574 575 576 577 578 579 580 581 582 583 584 585 586 587 588 589 590 591 592 593 594 595 596 597 598 599 600 601 602 603 604 605 606 607 608 609 610 611 612 613 614 615 616 617 618 619 620 621
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Table 3 presents the comparison between preand post-privatization performance of privatized banks based on both the parametric t-test and the non-parametric Wilcoxon signed-rank test. The results reveal that both protability ratios decrease after divestiture of privatized banks. While the decrease in ROA is not significant, the statistical tests pass the critical values of signicance for ROE. Surprisingly, such decline in protability ratios is not accompanied with a similar decline in the loan losses to loan ratio, that is, improvement in asset quality. In contrast, the loan losses to loan ratio increases slightly after privatization, but not at any level of signicance. As for capital risk indicators, we nd an insignicant increase in the core capital to assets ratio and an insignicant decline in the loans to total capital ratio, which refers to a steady position in capital risk indicators for privatized banks. We also document similar ndings for all operating eciency ratios as they do not show any signicant change following privatization. The liquidity indicator, measured by investment securities to total assets, declines signicantly at the 5% level whereas the decline in the asset growth ratio is insignificant. Although it appears that the performance of privatized banks deteriorated following privatization, we cannot draw conclusions from these results at this point because the data used in the analysis are not adjusted for industrywide factors that may be aecting the performance measures of these banks.
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529 (a) Pre- versus post-privatization performance of 530 privatized banks (unadjusted basis)
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Table 3. Comparison of pre- and post-privatization performance of privatized banks Proxies Protability indicators Return on assets Returns on equity No. of banks increased Pre-privatization Post-privatization Change in mean t-Statistic for z-Statistic for dierence (decreased) mean (median) mean (median) (median) dierence in means in medians PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT 4 (8) 2 (10) 7 (5) 0.017 (0.018) 0.229 (0.232) 0.02 (0.017) 0.078 (0.071) 7.35 (7.13) 0.014 (0.013) 0.164 (0.158) 0.022 (0.019) 0.082 (0.081) 7.242 (6.907) 0.020 (0.022) 0.022 (0.022) 0.133 (0.131) 0.084 (0.074) 0.088 (0.10) 0.004 (0.004) 0.065 (0.070) 0.001 (0.002) 0.004 (0.008) 0.106 (0.627) 0.003 (0.004) 0.003 (0.002) 0.006 (0.012) 1.782 3.329*** 1.451 2.471**
Asset quality indicators Loan losses to loans Capital risk indicators Core capital to assets
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Loans to total capital (x) Operating eciency indicators Net interest margin Non-interest revenue production Return on loans Liquidity risk indicators Investment securities to total assets Growth indicators Asset growth rate
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0.115 (0.105)
The table shows the results of the parametric t-test and the non-parametric Wilcoxon signed-rank test for the signicant changes in the mean and median values of the selected performance measures of privatized banks in the pre- and post-privatization periods. We provide the mean (median) values of each variable for the pre- and post-privatization period, the mean (median) change for each variable after versus before privatization, and t- and z-statistic with their signicant level. The number of useable banks is provided along with the number of banks that experienced an increase or decrease after privatization. For the parametric (non-parametric) test, we list the results under the null hypothesis that the mean (median) performance change = 0.0 versus the alternative hypothesis that the mean (median) performance change 5 0. *** and ** refer to the 1% and 5% signicance levels, respectively.
PR
0.048 (0.045) 0.027 (0.032)
2.615**
2.079**
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1.230
1.059
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Table 4. Relative performance change comparison between privatized banks and PVBs and MPVBs
Proxies PVBs benchmark Majority PVBs benchmark z-Statistic No. of banks Privatized Private Dierences t-Statistic for z-Statistic for No. of banks Privatized Private Dierences t-Statistic for dierence in for dierence mean mean mean increased dierence dierence mean mean mean increased in medians means (median) (median) (median) (decreased) in medians in means (median) (median) (median) (decreased) 0 (12) 0 (12) 6 (6) 0.153 (0.171) 0.283 (0.309) 0.640 (0.109) 0.540 (0.561) 0.419 (0.431) 0.128 (0.108) 0.693 (0.666) 0.702 (0.725) 0.512 (0.018) 0.037 (0.062) 0.095 (0.023) 0.174 (0.203) 0.313 (0.266) 0.084 (0.053) 0.233 (0.234) 0.123 (0.081) 5.382*** 7.865*** 3.020*** 3.020*** 4 (8) 0 (12) 6 (6) 8 (4) 4 (8) 8 (4) 4 (8) 4 (8) 8 (4) 10 (2) 0.153 (0.171) 0.283 (0.309) 0.640 (0.109) 0.120 (0.130) 0.069 (0.081) 0.216 0.265 0.067 (0.060) 0.076 (0.108) 0.294 (0.359) 0.121 (0.345) 0.117 (0.088) 0.360 (0.305) 0.097 (0.086) 0.040 (0.042) 0.156 (0.158) 0.165 (0.158) 0.028 (0.035) 0.154 (0.154) 0.521 (0.524) 0.550 (0.541) 0.270 (0.277) 0.642 (0.618) 0.544 (0.023) 0.161 (0.156) 0.087 (0.220) 0.05 (0.067) 0.039 (0.071) 0.077 (0.047) 0.227 (0.189) 0.429 (0.205) 2.031* 6.559*** 1.765* 3.020***
Protability indicators Return on assets Returns on equity
Asset quality indicators Loan losses to loans Capital risk indicators Core capital to assets Loans to total capital (x)
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7 (5) 5 (7) 7 (5) 5 (7)
0.120 (0.130) 0.069 (0.081) 0.216 0.265 0.067 (0.060) 0.076 (0.108) 0.294 (0.359) 0.121 (0.345)
RR
0.084 (0.097) 0.026 (0.026) 0.042 (0.056) 0.246 (0.198) 0.160 (0.161) 0.526 (0.583) 0.244 (0.235)
1.023
0.000
1.089
0.000
ARTICLE IN PRESS
WORLD DEVELOPMENT
0.440 0.844
0.431 0.000
1.957* 0.790
1.687* 0.981
Operating eciency indicators Net interest margin 9 (3) Non-interest revenue 2 production (10) Return on loans 4 (8) Liquidity risk indicators Investment securities to total assets Growth indicators Asset growth rate
EC
1.419
4.306*** 1.395
TE
1.373
0.413 0.651 1.283
0.745 0.432 1.137
2.807*** 1.215
1.964*
1.726*
0.392
0.118
The table shows the results of the parametric t-test and the non-parametric Wilcoxon signed-rank test for the signicant dierences between privatized banks and both PVBs and MPVBs based on the mean and median values of selected performance measures. We compare the relative performance change for each group of banks and test for the signicant dierences between them. We provide the mean (median) values of each variable based on the relative performance change method, the mean (median) dierences between privatized and both PVBs and MPVBs, and t- and z-statistic with their signicant level. The number of useable banks is provided along with the number of banks that experienced an increase or decrease compared with their bank counterparts. For the parametric (non-parametric) test, we list the results under the null hypothesis that the mean (median) proportional performance change of each of the two samples = 0.0 versus the alternative hypothesis that the mean (median) proportional performance change of each of the two samples 5 0. *** and * refer to the 1%, and 10% signicance levels, respectively.
PR
2.007*
1.765*
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1.560
1.608
No. of Pages 20
Table 5. Relative performance change comparison between privatized banks and majority state- and state-owned banks
Proxies Majority state-owned banks benchmark State-owned banks benchmark Dierences t-Statistic for z-Statistic for State No. of banks Privatized Maj. state Dierences t-Statistic for z-Statistic for No. of banks Privatized dierence in dierence mean mean increased dierence dierence mean mean increased medians in means (median) (median) (decreased) in medians in means (median) (median) (decreased) 7 (5) 9 (3) 8 (4) 0.153 (0.171) 0.283 (0.309) 0.640 (0.109) 0.306 (0.378) 0.538 (0.559) 0.256 (0.262) 0.153 (0.105) 0.256 (0.265) 0.896 (0.423) 0.146 (0.130) 0.043 (0.048) 1.100 2.747** 0.902 2.236** 0 (12) 0 (12) 10 (2) 6 (6) 4 (8) 9 (3) 3 (9) 12 (0) 4 (8) 4 (8) 0.153 (0.171) 0.283 (0.309) 0.640 (0.109) 0.120 (0.130) 0.069 (0.081) 0.216 0.265 0.067 (0.060) 0.076 (0.108) 0.294 (0.359) 0.121 (0.345) 1.051 (1.036) 0.719 (0.744) 0.358 (0.360) 0.199 (0.184) 0.066 (0.075) 0.006 (0.020) 0.075 (0.049) 0.259 (0.267) 0.016 (0.008) 0.112 (0.231) 1.204 (1.087) 1.001 (0.996) 0.998 (0.461) 0.079 (0.083) 0.003 (0.133) 0.210 (0.244) 0.165 (0.193) 0.335 (0.330) 0.310 (0.351) 0.009 (0.096) 7.566*** 8.846*** 3.020*** 3.020***
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7 (5) 6 (6) 3 (9) 4 (8)
1.826*
2.078**
2.015*
2.471**
0.120 (0.130) 0.069 (0.081)
Operating eciency indicators Net interest margin 11 (1) Non-interest revenue 3 (9) production Return on loans 6 (6) Liquidity risk indicators Investment securities to total assets Growth indicators Asset growth rate
RR
0.026 (0.060) 0.026 (0.046) 0.323 (0.347) 0.051 (0.016) 0.069 (0.096) 0.094 (0.014) 0.171 (0.164)
ARTICLE IN PRESS
1.466 0.359
1.373 0.000
0.961 0.025
0.000 0.667
0.216 0.265 0.067 (0.060) 0.076 (0.108) 0.294 (0.359) 0.121 (0.345)
EC
0.539 (0.576) 0.118 (0.076) 0.007 (0.001) 0.200 (0.259) 0.050 (0.223)
4.401***
2.785*** 1.844* 0.000
1.712 2.696** 5.926***
1.530 2.157** 3.020***
2.011* 0.7641
1.791*
TE
0.183
1.687*
0.039
The table shows the results of the parametric t-test and the non-parametric Wilcoxon signed-rank test for the signicant dierences between privatized banks and both majority state-and state-owned banks based on the mean and median values of selected performance measures. We compare the relative performance change for each group of banks and test for the signicant dierences between them. We provide the mean (median) values of each variable based on the relative performance change method, the mean (median) dierences between privatized and both majority state- and state-owned banks, and t- and z-statistic with their signicant level. The number of useable banks is provided along with the number of banks that experienced an increase or decrease compared with their bank counterparts. For the parametric (nonparametric) test, we list the results under the null hypothesis that the mean (median) proportional performance change of each of the two samples = 0.0 versus the alternative hypothesis that the mean (median) proportional performance change of each of the two samples 5 0. ***, ** and * refer to the 1%, 5%, and 10% signicance levels, respectively.
PR
2.702**
2.01**
0.029
0.353
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ARTICLE IN PRESS
WORLD DEVELOPMENT
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the sample privatized banks relative to their bank counterparts with 100% private ownership or majority private ownership, such results might be expected if we believe that privatized banks need more time to improve their performance and catch up to the level of already wholly private-owned or majority private-owned banks. Therefore, it is interesting to compare the relative performance changes of our sample-privatized banks with majority state-owned and wholly state-owned banks. The results reported in Table 5 tend to be inconsistent and somewhat surprising and hard to explain. On one hand, the relative performance changes of the sample-privatized banks are better compared with MSTBs in terms of ROA and ROE (although only signicant for ROE). On the other hand, we nd that the relative performance changes in the protability ratios of privatized banks are signicantly lower than those of STBs at the 1% level. More surprising is that such underperformance in protability is accompanied with a signicant decrease in asset quality. As for capital risk indicators, we nd insignicant dierences in relative performance changes between privatized banks and their bank counterparts. However, when we look at the operating eciency indicators we see mixed results. The relative performance changes of privatized banks outperform those of MSTBs and STBs in terms of NIM and return on loans (signicant only when compared with MSTBs for the rst ratio and with STBs for the second ratio), while they underperform MSTBs and STBs in terms of non-interest revenue at the 10% and 5% levels, respectively. The relative performance changes in the liquidity of privatized banks decline compared to both MSTBs and STBs at the 10% and the 5% levels, respectively. However, we nd no signicant dierences in relative performance changes in asset growth between our sample privatized banks and their counterparts. Concentrating on the most important measures, protability and eciency, we nd that our sample privatized banks outperform MSTBs and underperform STBs in terms of relative performance changes in protability, while we have inconsistent results in terms of operating eciency. It is hard to explain why the relative performance changes of protability of privatized banks are better compared to MSTBs but worse compared to STBs. We could, however, argue that STBs are usually less protable than privatized banks; as a
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result, STBs can improve protability more rapidly. The literature also provides us with some guidelines regarding this issue. Boardman and Vining (1989) nd that mixed rms (when state-owned rms are partially privatized) perform worse than SOEs. Moreover, Huang and Song (2001) show that partial privatization cannot improve the performance of H-rms in Hong Kong, and it may deteriorate their operating performance when the state retains a controlling right. Applying that to our sample privatized banks, we note that only one bank is fully privatized, four banks have 20% or less state ownership, and seven banks have 2050% state ownership. So the fact that privatized banks perform worse than STBs seems to be consistent with the literature, in which mixed rms perform worse than SOEs when the state keeps a signicant portion of the ownership. Given the above-mentioned results, our question remains without a denitive answer: To privatize or not to privatize? Although it seems from the empirical results that privatization did not improve the performance of targeted banks, this unsatisfactory performance might be due to the transition period from state control to private control. In other words, we have to take into consideration that privatization, particularly in the nancial sector, takes time to unfold, given that state ownership is reduced gradually. We have to treat these results with caution for three primary reasons. First, banks that were privatized represent a select few that were more readily sold because they were already performing well, and therefore had little potential for further improvement. Second, STBs and MSTBs are usually less protable and less ecient than privatized banks because better banks are usually privatized rst. Consequently, the STBs and MSTBs can improve their protability and eciency more rapidly, so the deck might be stacked against privatized banks. Last, the evidence, so far, could be attributed to the fact that the Egyptian government restructures its banks before selling them; consequently, these banks show the same or better performance changes compared to privatized banks.
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(c) Post-privatization comparison and entire period regression
729 (i) Post-privatization comparison Although STBs show superior relative per- 730 formance changes in protability compared 731
PR
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No. of Pages 20 13
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with the privatized sample banks, one could argue that the ndings so far do not mean that STBs currently perform better than or similar to the privatized banks. To check for this proposition, we compare the post-privatization performance, not performance changes, of privatized banks with not only STBs but with all other bank counterparts to determine which group of banks performs better. We report the results in Tables 6 and 7. As we can see from Table 6, the results continue to corroborate our previous ndings in which PVBs and MPVBs perform signicantly better than privatized banks in the post-privatization period in terms of protability and eciency ratios, while asset quality of privatized banks is signicantly better compared with both PVBs and MPVBs at the 10% and 1% levels, respectively. Both capital risk indicators show insignicant dierences between privatized banks and either PVBs or MPVBs, but only core capital to assets is signicantly higher for MPVBs, at the 1% level. Also, there are no signicant dierences in liquidity between privatized banks and their bank counterparts, while the asset growth rate is signicantly higher for PVBs at the 1% level only. Moving on to Table 7, the results clearly indicate that privatized banks substantially outperform both MSTBs and STBs in terms of protability and eciency. Meanwhile, there is no signicant indication that such superior performance is achieved at the expense of asset quality. The capital risk indicators show that MSTBs and STBs have a signicantly higher loan to total capital ratio at the 1% level compared to privatized banks. It might be argued that state-controlled banks still have a large quantity of loans that have already been granted to SOEs and not yet repaid. However, the core capital to assets is sucient for privatized banks (8.2%), although signicantly below those reported for MSTBs (11.2%) at the 1% level but signicantly higher than those reported for STBs (4.8%) at the 1% level. As for liquidity, the results show no signicant dierences between privatized banks and MSTBs, while STBs hold a signicantly better liquidity position compared with our sample banks. Last, privatized banks seem to expand business more rapidly than their counterparts, as the asset growth rate is signicantly higher for privatized banks at the 10% level. So what can we conclude from the analysis of Tables 6 and 7? Collectively, their results reveal that private-owned and majority private-owned
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banks, including privatized banks, are unanimously more protable and ecient than stateowned and majority state-owned banks. If we were to rank these banks according to their ownership structure, the conclusion would be that the greater the private ownership involvement, the more protable and ecient the banks are, 13 and vice-versa, that is, the higher the state ownership involvement, the less protable and ecient the banks are. Such ndings tend to be consistent with many previous research studies, in which state ownership of banks is alleged to be less ecient than private ownership (see e.g., Bonin et al., 2005a; Bonin, Mizsei, Szekely, & Wachtel, 1998; Isik & Hassan, 2002).
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(ii) Entire period: further evidence from xed-eects regression As we mentioned earlier, since ownership structure seems to aect bank performance, and since this eect is predicated upon the degree of state or private ownership involvement, we can model this relationship by using the percentage of each ownership type as a determinant of bank performance. To test the eects of ownership structure on bank performance and to validate the parametric and non-parametric test results, we employ several cross-sectional regressions. We cover the period from 1995 to 2001 and include size and industry as control variables. 14 We estimate the following three models:
PM i;t at b1 COTRi;t b2 SIZEi;t b3 INDi;t ei;t ; 2 PM i;t at b1 OWN i;t b2 SIZEi;t b3 INDi;t ei;t ; 3 PM i;t at b1 FORGi;t b2 PVT i;t b3 SIZEi;t b4 INDi;t ei;t ; 4
TE
PR
UN CO RR
820 821 822 823 824 825 826 827 828 829 830 831 832 833 834 835 836 837
where PMi,t is the performance measure of bank i at year t (ROA, asset quality, NIM, and asset growth); 15 COTRi,t is a dummy variable that takes one if the state owns less than 50% of bank i at year t and zero if it owns more than 50%; SIZEi,t is the log of total assets of bank i at year t; INDi,t is a dummy variable that takes one if bank i is a commercial bank at year t and zero if it is an investment bank; OWNi,t is the sum of private and foreign ownership percentage in bank i at year t (i.e., 1 the percentage owned by the state); FORGi,t is the percentage of foreign ownership in bank i at year t; and PVTi,t is the percentage of private ownership in bank i at year t. To control for year-specic eects before we proceed with the above three models, it is
14
Table 6. Post-privatization performance comparison between privatized banks and PVBs and MPVBs
Proxies No. of banks increased (decreased) Privatized mean (median) PVBs benchmark Private mean (median) Dierences mean (median) t-Statistic for dierence in means z-Statistic for dierence in means medians 2.000** 2.157** No. of banks increased (decreased) Privatized mean (median) Majority PVBs benchmark Maj. private mean (median) Dierences mean (median) t-Statistic for dierence in means z-Statistic for dierence in means medians 1.451 1.97**
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Asset quality indicators Loan losses to loans Capital risk indicators Core capital to assets
CO
3 (9) 4 (8) 6 (6) 2 (10) 4 (8) 3 (9) 6 (6) 1 (11)
4 (8) 3 (9)
0.014 (0.013) 0.164 (0.158) 0.022 (0.019)
0.019 (0.019) 0.234 (0.238) 0.027 (0.026)
0.005 (0.006) 0.070 (0.071) 0.005 (0.008) 0.006 (0.008) 0.107 (0.256) 0.007 (0.006) 0.003 (0.003) 0.006 0.005
2.478** 2.955**
4 (8) 3 (9) 2 (10) 0 (12) 9 (3) 4 (8) 2 (10) 2 (10) 0 (12) 4 (8)
0.014 (0.013) 0.164 (0.158) 0.022 (0.019) 0.082 (0.081) 7.242 (6.907) 0.020 (0.022) 0.022 (0.022) 0.133 (0.131) 0.084 (0.074)
0.017 (0.02) 0.20 (0.19) 0.032 (0.032) 0.146 (0.147) 6.34 (6.40) 0.025 (0.025) 0.025 (0.025) 0.146 (0.146) 0.087 (0.085) 0.10 (0.10)
0.003 (0.004) 0.044 (0.043) 0.011 (0.013) 0.064 (0.069) 0.902 (0.499) 0.005 (0.003) 0.004 (0.004) 0.013 (0.013) 0.003 (0.016) 0.010 (0.004)
1.536 2.534**
Loans to total capital (x) Operating eciency indicators Net interest margin Non-interest revenue production Return on loans Liquidity risk indicators Investment securities to total assets Growth indicators Asset growth rate
0.082 (0.081) 7.242 (6.907)
RR
0.087 (0.089) 7.135 (7.059) 0.027 (0.028) 0.025 (0.025) 0.138 (0.139) 0.070 (0.065) 0.181 (0.181)
1.872*
1.708*
3.625***
2.628***
ARTICLE IN PRESS
WORLD DEVELOPMENT
0.906 0.188
0.902 0.000
10.517*** 1.605
3.020*** 1.451
0.020 (0.022) 0.022 (0.022) 0.133 (0.131) 0.084 (0.074) 0.088 (0.100)
EC
0.014 (0.001) 0.093 (0.081)
2.866** 1.84*
1.801*
TE
2.393** 1.962** 1.968**
2.043* 2.746** 3.059**
1.765* 2.158** 2.314**
0.995
0.000
4.644***
2.863***
The table shows the results of the parametric t-test and the non-parametric Wilcoxon signed-rank test for the signicant dierences between privatized banks and both PVBs and MPVBs based on the mean and median values of selected performance measures. We compare the post-privatization performance for each group of banks and test for the signicant dierences between them. We provide the mean (median) values of each variable based on the post-privatization performance, the mean (median) dierences between privatized and both PVBs and MPVBs, and t- and z-statistic with their signicant level. The number of useable banks is provided along with the number of banks that experienced an increase or decrease compared with their bank counterparts. For the parametric (non-parametric) test, we list the results under the null hypothesis that the mean (median) post-privatization performance of each of the two samples = 0.0 versus the alternative hypothesis that the mean (median) postprivatization performance of each of the two samples 5 0. ***, ** and * refer to the 1%, 5%, and 10% signicance levels, respectively.
PR
0.088 (0.100)
0.21
0.35
0.675
0.745
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Table 7. Post-privatization performance comparison between privatized banks and state- and majority state-owned banks
Proxies Majority state-owned banks benchmark State-owned banks benchmark Dierences t-Statistic for z-Statistic for State No. of banks Privatized Maj. state Dierences t-Statistic for z-Statistic for No. of banks Privatized dierence dierence mean mean increased dierence in dierence in mean mean increased in medians in means (median) (median) (decreased) medians means (median) (median) (decreased) 10 (2) 10 (2) 0.014 (0.013) 0.164 (0.158) 0.022 (0.019) 0.008 (0.007) 0.060 (0.056) 0.016 (0.016) 0.006 (0.005) 0.103 (0.093) 0.005 (0.003) 0.030 (0.033) 2.566 (2.732) 2.893** 4.544*** 2.236** 2.785*** 10 (2) 8 (4) 5 (7) 12 (0) 0 (12) 10 (2) 6 (6) 11 (1) 2 (10) 8 (4) 0.014 (0.013) 0.164 (0.158) 0.022 (0.019) 0.082 (0.081) 7.242 (6.907) 0.020 (0.022) 0.022 (0.022) 0.133 (0.131) 0.084 (0.074) 0.005 (0.005) 0.108 (0.109) 0.020 (0.019) 0.048 (0.048) 12.349 (12.425) 0.009 (0.009) 0.020 (0.020) 0.111 (0.111) 0.133 (0.130) 0.057 (0.060) 0.009 (0.008) 0.056 (0.049) 0.002 (0.002) 0.034 (0.033) 5.107 (5.482) 0.011 (0.013) 0.001 (0.001) 0.022 (0.019) 0.048 (0.062) 0.031 (0.041) 4.023*** 2.437** 2.785*** 1.99**
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8 (4) 2 (10) 2 (10) 7 (5) 8 (4)
1.521
1.451
0.540
0.118
0.082 (0.081) 7.242 (6.907)
RR
0.112 (0.113) 9.808 (9.597) 0.015 (0.014) 0.019 (0.019) 0.139 (0.137) 0.067 (0.067) 0.063 (0.064)
ARTICLE IN PRESS
4.756*** 4.082***
2.784*** 2.706***
5.665*** 9.094***
3.020*** 3.020***
Operating eciency indicators Net interest margin 10 (2) Non-interest revenue 8 production (4) Return on loans 4 (8) Liquidity risk indicators Investment securities to total assets Growth indicators Asset growth rate
0.020 (0.022) 0.022 (0.022) 0.133 (0.131) 0.084 (0.074) 0.088 (0.100)
EC
0.006 (0.008) 0.003 (0.003) 0.006 (0.003) 0.017 (0.004) 0.025 (0.033)
2.411** 1.951* 0.95
TE
1.232
2.079** 1.687* 0.67
4.844*** 0.619 5.028***
2.785*** 0.000 2.942***
1.059
1.796*
1.682*
The table shows the results of the parametric t-test and the non-parametric Wilcoxon signed-rank test for the signicant dierences between privatized banks and both majority state- and state-owned banks based on the mean and median values of selected performance measures. We compare the post-privatization performance for each group of banks and test for the signicant dierences between them. We provide the mean (median) values of each variable based on the post-privatization performance, the mean (median) dierences between privatized and both majority state- and state-owned banks, and t- and z-statistic with their signicant level. The number of useable banks is provided along with the number of banks that experienced an increase or decrease compared with their bank counterparts. For the parametric (nonparametric) test, we list the results under the null hypothesis that the mean (median) post-privatization performance of each of the two samples = 0.0 versus the alternative hypothesis that the mean (median) post-privatization performance of each of the two samples 5 0. ***, ** and * refer to the 1%, 5%, and 10% signicance levels, respectively.
PR
3.489***
2.471**
0.088 (0.100)
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1.857*
1.686*
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15
ARTICLE IN PRESS
WORLD DEVELOPMENT
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Table 8. Fixed-eects regression for performance measures Dependent variable Independent variables Panel A: PMi,t = at + b1COTRi,t + b2SIZEi,t + b3INDi,t + ei,t COTRi,t 0.004 (1.99)** 0.006 (1.57)* SIZEi,t 0.003 (5.6)*** 0.004 (3.76)*** INDi,t 0.00 (0.24) 0.006 (2.5)*** No. R2 (%) F-ratio 229 18.6 16.8*** 229 8.3 6.2*** ROA Asset quality NIM
PR
229 27.5 28.4*** 229 28.2 29.5*** 229 29.2 23.6***
TE
0.003 (2.69)*** 0.004 (7.4)*** 0.001 (0.93)
EC
Panel B: PMi,t = at + b1OWNi,t + b2SIZEi,t + b3INDi,t + ei,t OWNi,t 0.006 (2.3)** 0.007 (1.66)* SIZEi,t 0.003 (5.1)*** 0.004 (4.2)*** INDi,t 0.00 (0.06) 0.007 (2.8)*** No. R2 (%) F-ratio 229 19.1 17.7*** 229 8.6 7.1***
0.007 (2.8)*** 0.004 (6.7)*** 0.001 (0.72)
Panel C: PMi,t = at + b1FORGi,t + b2PVTi,t + b3SIZEi,t + b4INDi,t + ei,t FORGi,t 0.003 (1.58)* 0.005 (0.97) 0.004 (1.62)* PVTi,t 0.007 (2.64)*** 0.008 (1.79)* 0.008 (3.01)*** SIZEi,t 0.003 (5.3)*** 0.004 (4.2)*** 0.004 (7.1)*** INDi,t 0.00 (0.11) 0.007 (2.9)*** 0.001 (0.63) No. R2 (%) F-ratio 229 19.1 17.7*** 229 8.8 7.6***
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The table shows the results from cross-sectional regression analyses of the determinants of bank performance from 1995 to 2001. PMi,t is the performance measure of bank i at year t, which refers to ROA (return on assets), asset quality, NIM (net interest margin) and asset growth; COTRi,t is a dummy variable that takes one if the state owns less than 51% of bank i at year t and zero if it owns more than 50%; SIZEi,t is the log of total assets of bank i at year t; and INDi,t is a dummy variable that takes one if bank i is commercial at year t and zero if it is an investment; OWNi,t is the sum of the percentage of private and foreign ownership in bank i at year t; FORGi,t is the percentage of foreign ownership in bank i at year t; and PVTi,t is the percentage of private ownership in bank i at year t. ***, ** and * refer to the 1%, 5%, and 10% signicance levels, respectively. Figures between parentheses are t-statistics.
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important to test if at, t = 1, . . . , N, are constant coecients specic to each year. Their presence assumes that dierences across the considered years appear by means of dierences in the constant term. Hence, the point is to prove whether the individual coecients, at, t = 1, . . . , N, are not all equal. This is particularly interesting if we want to dierentiate between the situations in each year considered in the sample and corroborate the existence of signicant heterogeneity across years. The Fisher test validates the xed-eects specication in favor of random eectsthat is, the presence of individual eects is not equal. However, when we perform the Hausman specication test, 16 it is proven that under the null hypothesis, the two estimates from xed-eects
and random-eects models could not dier systematically since they are both consistent. Nevertheless, because we need to consider heterogeneity across years, we adopt the xedeects specications. 17 Panel A of Table 8 shows that the dummy variable has a signicant positive impact on ROA, NIM, and asset growth at the 5% and 1% levels for the rst two indicators and at the 10% level for the latter one, respectively. Also, the asset quality ratio has a negative and signicant coecient at the 10% level which means that banks with majority private and foreign ownership demonstrate better asset quality (note that asset quality is measured as loan losses to loan). In Panel B, we repeat the same regressions but include the foreign and
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Asset growth
0.03 (1.67)* 0.005 (0.46) 0.04 (1.48) 223 3.6 2.26*
0.1 (2.2)** 0.003 (0.31) 0.03 (1.2) 223 4.1 2.8**
0.12 (2.26)** 0.08 (1.71)* 0.004 (0.34) 0.04 (1.38) 223 4.4 3.2**
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private ownership percentages instead of using the dummy variable. The results, however, continue to produce similar outcomes. The conclusion so far is that regardless of bank size and industry and with respect to their eects on bank performance, banks with less state ownership perform better. These ndings add further support to our previous results the analysis of post-privatization performance, which indicate that PVBs and MPVBs perform better than MSTBs and STBs and tend to be in line with the literature (see e.g., Bonin et al., 2005a; Hasan & Marton, 2003; Isik & Hassan, 2002). 18 To understand whether foreign or private ownership has a greater impact on bank performance, we utilize Eqn. (4) and report the results in Panel C. The ndings from these regressions indicate clearly that private ownership tends to have a greater impact on bank performance than foreign ownership, as the coecients of all performance measures (apart from asset growth) are higher and more signicant for private ownership than for foreign ownership. 7. CONCLUSION In this paper, we examined the performance of 12 Egyptian JVBs that were fully or partially privatized from 1996 to 1999. Comparing pre- versus post-privatization performance, the results show signicant declines in some protability and liquidity ratios, although the changes in other performance measures are not signicant at any level. However, the matched adjusted data show that the relative performance changes of privatized banks lag behind their bank counterpartsPVBs and majority private-owned banks (MPVBs)particularly in terms of protability and certain eciency ratios. As for comparing the relative performance changes of privatized banks to
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majority state-owned banks (MSTBs) and state-owned banks (STBs), we nd that, in terms of protability, privatized banks outperform MSTBs but underperform STBs. The results from analyzing the operating eciency ratios fail to provide us with a clear conclusion of whether the relative performance changes of privatized banks outperform or underperform their bank counterpartsMSTBs and STBs. Such results could be understood if we believe that privatized banks need more time to improve their performance as corporate governance problems often continue and might even be worse in these banks, at least in the short run. We then delved further into the post-privatization performance of banks according to their ownership structure. We nd that PVBs and banks having majority private ownership, including privatized banks, are more protable and ecient than state- and majority stateowned banks. Furthermore, the results we obtain from xed-eects regressions over the entire period provide further evidence that private ownership is associated with better performance. Thus, there is support that ownership structure really does matter and that better bank performance essentially depends on a lesser degree of state-ownership involvement. Summing up, with respect to the ndings from comparing the relative performance changes of privatized banks to their bank counterparts, we believe that reducing state-ownership stakes in banks is associated with better performance. This paper provides a rst step toward a complete analysis of the impact of privatization and ownership structure on bank performance in Egypt. It might be fruitful to revisit these results and carry on further research when we have a longer post-privatization period and the sample of privatized banks increases. We might then reach more conclusive evidence.
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1. There are many issues we will not cover that deserve further investigation: for example, the most eective way to privatize banks; public and political reasons behind bank privatizations; the impact of international institutional investors on privatized banks; and the role of bank privatization in enhancing the nancial sector and promoting economic growth.
3. In the second half of 2005, the government selected Bank of Alexandria, and it is expected to be privatized during the second quarter of the 2006 scal year. 4. Only one bank is classied as an investment bank. 5. Most banks in this group (four out of six) are classied as business and investment banks, but in reality their primary activity is commercial banking.
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960 2. For more on Egypts privatization experience, see 961 Omran (2004a, 2004b).
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969 6. Two out of these six banks are classied as invest970 ment banks. 971 972 973 974
7. We excluded the other three state-owned specialized banks because they have their own characteristics that dier substantially in nature from commercial and investment banks.
13. The data (not reported here) on ownership structure of privatized banks and majority PVBs show clearly that the private ownership involvement in MPVBs is greater than in privatized banks. 14. Size is measured as the logarithm of total assets; we treat industry as a dummy variable that takes one if the bank is a commercial bank and zero if it is an investment bank.
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977 9. With the exception of the third matched control 978 group (MSTBs), all other groups are commercial banks. 979 980 981 982 983 984 985 986 987 988 989 990 991 992 993 994 995 1024 1025 1026 1027 1028 1029 1030 1031 1032 1033 1034 1035 1036 1037 1038 1039 1040 1041 1042 1043 1044 1045
10. Each bank counterpart has three pre- and postprivatization mean values: one based on 1997 as year 0 or the year of privatization, and the other two values based on 1998 and 1999 as year 0. By doing this, we were able to match each JVB to its group of bank counterparts according to its specic privatization date. 11. As a check on the robustness of this method, we employ the absolute performance method instead. We, however, nd similar results. For the sake of space, we did not present the statistical tests and the ndings from this method, but they are available from the author upon request. 12. Of course, the privatized banks need to have their capital adequacy match Basel requirements (8%), therefore they have to increase their capital. We see that the capital adequacy of PVBs and MPVBs already meet this ratio. Moreover, this ratio is around 15% for MPVBs.
16. Under the null hypothesis, the Hausman statistic is asymptotically distributed as chi-square with k degrees of freedom. 17. We also perform the random-eects specications, and the results using this technique yield similar ndings. We do not report the results from the random-eects specications, for the sake of space, but they are available from the author upon request. 18. We also estimate the same models given in Table 8 year by year, and we nd that the results are qualitatively similar. We did not report the ndings from these regressions here for the sake of space, but they are available from the author upon request.
REFERENCES
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15. Although we estimate the regression models for all performance measures, for the sake of space we limit our presented results to those variables that represent the most important measures. However, the results for other performance measures corroborate the ndings presented in Table 8, and they are available from the author upon request.
975 8. We exclude year 0 because it includes both the public976 and private-ownership phases of privatized banks.
Abarbanell, J., & Bonin, J. (1997). Bank privatization in Poland: the case of Bank Slaski. Journal of Comparative Economics, 25(1), 3161. Barber, B., & Lyon, J. (1996). Detecting abnormal operating performance: the empirical power and specication of test statistics. Journal of Financial Economics, 41, 359399. Berger, A., Clarke, G., Cull, R., Klapper, L., & Udell, G. (2005). Corporate governance and bank performance: a joint analysis of the static, selection, and dynamic eects of domestic, foreign, and state ownership. Journal of Banking and Finance, 29(89), 21792221. Boardman, A., & Vining, A. (1989). Ownership and performance in competitive environment: a comparison of the performance of private, mixed and stateowned enterprises. Journal of Law and Economics, 32, 133. Bonin, J., Hasan, I., & Wachtel, P. (2005a). Bank performance, eciency and ownership in transition countries. Journal of Banking and Finance, 29(1), 3153.
Bonin, J., Hasan, I., & Wachtel, P. (2005b). Privatization matters: bank eciency in transition countries. Journal of Banking and Finance, 29(89), 21552178. Bonin, J., Mizsei, K., Szekely, M., & Wachtel, P. (1998). Banking in transition economies: Developing market oriented banking sector in Eastern Europe. Cheltenham: Edward Edgar. Bonin, J., & Wachtel, P. (1999). Lessons from bank privatization in Central Europe. William Davidson Institute working paper # 245. Boubakri, N., Cosset, J. C., Fischer, K., & Guedhami, O. (2005). Privatization and bank performance in developing countries. Journal of Banking and Finance, 29(89), 20152041. Clarke, G., & Cull, R. (1999a). Why privatize? The case of Argentinas public provincial banks. World Development, 27(5), 865886. Clarke, G., & Cull, R. (1999b). Provincial bank privatization in Argentina: The why, the how and so what. World Bank policy research working paper # 2159, World Bank, Washington, DC.
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Clarke, G., Cull, R., & Shirley, M. (2005). Bank privatization in developing countries: a summary of lessons and ndings. Journal of Banking and Finance, 29(89), 19051930. Cornett, M., Ors, E., & Tehranian, H. (2002). Bank performance around the introduction of a section 20 subsidiary. Journal of Finance, 57(1), 501521. Egyptian Ministry of Public Enterprise (2003). Privatization program performance from the start to 2003. MPE, Cairo. Farabullini, F., & Hester, D. (2001). The performance of some recently privatized Italian banks. Social Systems Research Institute working paper #2001-10, University of WisconsinMadison, Wisconsin. Fiani and Partners (various issues). Kompass Egypt nancial year book, Cairo: Fiani and Partners. Hasan, I., & Marton, K. (2003). Development and eciency of the banking sector in a transitional economy: Hungarian experience. Journal of Banking and Finance, 27(12), 22492271. Huang, S., & Song, F. (2001). Can a capitalist equity market help the reform of Chinese state-owned enterprises (SOEs)? Evidence from H-rms in Hong Kong. Hong Kong: The University of Hong Kong. Isik, I., & Hassan, K. (2002). Technical, scale and allocative eciencies of Turkish banking industry. Journal of Banking and Finance, 26, 719766. Markler, H. (2000). Bank transformation and privatization in Brazil: nancial federalism and some lessons about bank privatization. Quarterly Review of Economics and Finance, 40(1), 4569. Megginson, W. (2005a). The economic of bank privatization. Journal of Banking and Finance, 29(89), 19311980. Megginson, W. (2005b). The nancial economics of privatization. New York: Oxford University Press. Meyendor, A., & Snyder, E. (1997). Transactional structures of bank privatizations in central Europe
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and Russia. Journal of Comparative Economics, 25(1), 530. Nakane, M., & Weintraub, D. (2005). Bank privatization and productivity: evidence for Brazil. Journal of Banking and Finance, 29(89), 22592289. Omran, M. (2004a). The performance of state-owned enterprises and newly privatized rms: does privatization really matter? World Development, 32(6), 10191041. Omran, M. (2004b). Performance consequences of privatizing Egyptian state-owned enterprises: the eect of post-privatization ownership structure on rm performance. Multinational Finance Journal, 8(1&2), 74112. Omran, M. (2005). Underpricing and long-run performance of share issue privatizations in the Egyptian stock market. Journal of Financial Research, 28(2), 215234. Otchere, I. (2005). Do privatized banks in middle- and low-income countries perform better than rival banks? An intra-industry analysis of bank privatization. Journal of Banking and Finance, 29(89), 20672093. Unal, H., & Navarro, M. (1999). The technical process of bank privatization in Mexico. Journal of Financial Services Research, 16(1), 6183. Verbrugge, J., Megginson, W., & Owens, W. (1999). State ownership and the performance of privatized banks: An empirical analysis. Oklahoma: University of Oklahoma. Williams, J., & Nguyen, N. (2005). Financial liberalization, crisis, and restructuring: a comparative study of bank performance and bank governance in South East Asia. Journal of Banking and Finance, 29(89), 21192154.
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APPENDIX. NUMBER OF PRIVATIZED FIRMS IN EGYPT Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Total 3 0 3 3 2 9 5 4 Full privatization 1 14 14 8 1 7 3 3 12 5 1 2 33 6 2 2 1 3 6 7 3 2 1 33 Partial privatization 1 6 6 2 1 1 1 3 4 6 3 3 6 27 1 6 10 1 3 Yearly total 6 13 12 25 27 32 31 25 11 6 9 n.a. 664 1216 2792 3148 2358 2785 2476 1075 51 114
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Anchor investor IPOa ESAb Liquidation IPOa Asset sales Leases Number Valuec
The table shows the number of privatized rms classied by the method of sale and year by year. It also shows the value of privatized rms for each year and the total until 2003. Source: Egyptian Ministry of Public Enterprise (2003). a Initial public oering. b Employees shareholders association. c Millions of Egyptian pounds (rate 1 LE = 0.174 US$ as of December 2004).
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Bank Privatization WD Egypt

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WD 1875 16 January 2007; Disk Used

Privatization, State Ownership, and Bank Performance in Egypt

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PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

3. LITERATURE REVIEW ON BANK PRIVATIZATION

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5. PERFORMANCE MEASURES AND METHODOLOGY (a) Performance measures

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392 393 394 395 396 397 398 399

95 5 51 49 0 51 49 80 5 15 51 39.5 9.5 51 41 8 35 40 25 100 0 59 41 63 37 0 51 49 0 62 38 51 49 0 64 36 0

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PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

RPC i P i;t P i;t1 =P i;t1

P benchmark;t P benchmark;t1 =P benchmark;t1

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0.016 (0.02) 0.024 (0.023) 0.127 (0.119) 0.139 (0.14)

1.400 1.772 0.694

1.451 1.138 0.745

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Protability indicators Return on assets Returns on equity

0.413 0.651 1.283

0.745 0.432 1.137

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PRIVATIZATION, STATE OWNERSHIP, ANDBANK PERFORMANCE IN EGYPT

Protability indicators Return on assets Returns on equity

0.120 (0.130) 0.069 (0.081)

2.785*** 1.844* 0.000

1.712 2.696** 5.926***

1.530 2.157** 3.020***

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(c) Post-privatization comparison and entire period regression

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Protability indicators Return on assets Returns on equity

0.014 (0.013) 0.164 (0.158) 0.022 (0.019)

0.019 (0.019) 0.234 (0.238) 0.027 (0.026)

0.082 (0.081) 7.242 (6.907)

2.393** 1.962** 1.968**

2.043* 2.746** 3.059**

1.765* 2.158** 2.314**

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Protability indicators Return on assets Returns on equity

0.082 (0.081) 7.242 (6.907)

2.411** 1.951* 0.95

2.079** 1.687* 0.67

4.844*** 0.619 5.028***

2.785*** 0.000 2.942***

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0.003 (2.69)*** 0.004 (7.4)*** 0.001 (0.93)

0.007 (2.8)*** 0.004 (6.7)*** 0.001 (0.72)

0.03 (1.67)* 0.005 (0.46) 0.04 (1.48) 223 3.6 2.26*

0.1 (2.2)** 0.003 (0.31) 0.03 (1.2) 223 4.1 2.8**

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962 963 964 965 966 967 968

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1.712 2.696 5.926*

1.530 2.157 3.020*

2.393 1.962 1.968**

2.043* 2.746 3.059

1.765* 2.158 2.314

4.844* 0.619 5.028*

2.785* 0.000 2.942*

0.003 (2.69)* 0.004 (7.4)* 0.001 (0.93)

0.007 (2.8)* 0.004 (6.7)* 0.001 (0.72)

0.1 (2.2) 0.003 (0.31) 0.03 (1.2) 223 4.1 2.8