Impact of Institutions on Lending (eBook)

Dr. Chuluunbaatar Enkhzaya promovierte bei Prof. Dr. Alexander Karmann am Lehrstuhl für Geld, Kredit und Währung der Fakultät Wirtschaftswissenschaften der Technischen Universität Dresden. Sie ist als freiberufliche Beraterin für Regierungen und Unternehmen tätig.

Foreword 8
Preface 10
Overview 12
Table of Contents 14
Index of Tables 18
Index of Figures 20
Abbreviations 22
Introduction 25
Motivation 25
Research Questions 27
Structure 28
Part 1 The Impact of Institutions on Lending 31
1.1 The New Institutional Economics 31
1.1.1 Institutions Matter 31
1.1.2 Institutions in Economic Science: the New Institutional Economics 35
1.1.3 The Theory of Economic and Institutional Change 40
1.2 Institutional Framework of Lending 48
1.2.1 Applying NIE to Lending 48
1.2.2 Institutional Framework of Lending in Transition 51
1.3 Cognitive Approach to Analysing Institutions of Lending 58
1.3.1 Cognitive Approach to Institutional Analysis: Institutions, Mental Models and Knowledge 58
1.3.2 Models of Knowledge Organisation and Elicitation of Action-Regulating Knowledge 64
1.3.3 Bankers' Action-Regulating Knowledge in Lending 71
Part 2 The Economic and Banking Situation in Mongolia 73
2.1 The State of Economic Transition in Mongolia 73
2.1.1 The Historical and Political Background of the Mongolian Economy 73
2.1.2 The Stylised Facts of Transformation 77
2.1.3 Institutions in Transition 80
2.2 Performance of Lending Organisations in Mongolia 83
2.2.1 Financial Intermediation and the Role of Lending 83
2.2.2 Bank Behaviour: Loan Allocation and Lending Uncertainties 89
2.3 Institutions of Lending in Mongolia: Some Hypotheses 94
2.3.1 Incentives Shaped by Existing or Missing Institutions of Lending 94
2.3.2 Formal Institutions of Lending: Bank Regulation Norms on Lending Activity 97
2.3.3 The Inconsistency of Informal Institutional Constraints with Formal Norms 101
Part 3 Discrepancy between Bank Regulation Norms and Lending Practice in Mongolia 105
3.1 Diagnosing Action-Regulating Knowledge (Method) 105
3.1.1 Research Design and Methods 105
3.1.2 Concept Mapping as a Tool Based on Cognitive Science 109
3.1.3 Diagnosing the Action-Regulating Knowledge of Bankers with Concept Mapping 116
3.2 Bankers' Mental Model on Lending (Survey) 118
3.2.1 Sampling 119
3.2.2 Instrumentation: Key Concepts and Questions 122
3.2.3 Procedure 131
3.3 Lending Practice and Bank Regulation (Results) 134
3.3.1 Data Analysis 134
3.3.2 Findings 160
Part 4 Institutions Building and Adjustment of Bank Regulation Norms in Mongolia 169
4.1 Discussion of Findings on Informal Constraints with Respect to Formal Institutions 169
4.1.1 Informal Constraints of Lending in Mongolia 169
4.1.2 Incompatibility of Informal Institutions with Formal Institutions 171
4.2 Implications and Future Challenges 173
4.2.1 Restructuring the Overall Institutions Over Time 173
4.2.2 Approaches to Institution Building in Lending in Mongolia 175
Part 5 Conclusions 183
Annex 1: Reserve requirements for Mongolian banks 189
Annex 2: Prudential ratios for Mongolian banks 190
Annex 3: Concepts of sub-domain " Banking and Bank Supervision" (map III) 192
Annex 4: Reference map for action-regulating knowledge on sub-domain "Banking and Bank Supervision" 193
Annex 5: Individual Interview Sheet 194
Annex 6: Lending procedure (complete version) 195
Annex 7: Control roster for data collection during documents and records observation 197
Annex 8: Schedule plan for data collection 198
Annex 9: Summing-up the rough evaluation results of map II "Credit Risk Management and Credit Approval" 201
Annex 10: Summing-up the rough evaluation results of map III "Banking and Bank Supervision" 202
Annex 11: Cumulated matrix for map III "Banking and Bank Supervision" 203
Annex 12: Model of observation matrix: categories and Information units (notes and sources) 205
References 207

Introduction (p. 1)

Motivation

When In the early 1990s the post-communist countries implemented reform programmes to transform their previously centrally-planned economies into marketbased economies, an unprecedented "transition" was set in motion and the economies in transition (EIT) emerged. This change of economic co-ordination should lead to a more efficient use of resources with higher economic output. Closely monitored and financially supported by international organisations, such as the International Monetary Fund (IMF), the process of transition consisted of three main elements: privatisation, liberalisation and stabilisation.

It was assumed that liberalisation of prices and the creation of private property would result in the establishment of many enterprises, and competition between these would lead to an efficient allocation of resources and stabilisation. Yet these big bang reforms implying rapid transition process were nevertheless followed by so-called transition crises - especially in south-east European and central Asian EITs - from which many countries are still suffering.

The liberalisation of prices in Mongolia led to immoderately high inflation, peaking at 325 percent in 1992 and remaining in double-digits until the late 1990s. Aggregate output subsequently started to decline, reaching its lowest level in 1995. Stagnation continued long into the late 1990s before picking up to record a growth rate of 3.9 percent in 2002. Whereas the inflation rate has fallen and growth revived in the meantime, the loss of confidence in the national currency, the Tugrug, is proving difficult to restore. Some studies in this context put the Dollarisation ratio in Mongolia at up to 80 percent (Herr, 2003).

The low degree of macroeconomic achievement was put down to the absence of responsive microeconomic reforms. The global big bang strategy based on Neoclassic theory consisted of macroeconomic policies which assume a market mechanism that functions automatically, as if the market suddenly materialises by magic. The strategy neither considered the time needed to establish the market, nor dealt with this process itself. However, if the economic agents in EITs - enterprises, banks, households, the state - do not behave as economic agents do in market economies, the market mechanism cannot operate as it is supposed to.

Thus microeconomic reforms aimed at establishing the market and inducing supposed market-oriented behaviour need to be adjusted so that macroeconomic reform policies can realise the initial expectations. The economic literature on transition processes deals for the most part with the macroeconomics of transition, yet conditions at the microeconomic level are unfortunately almost ignored or taken for granted.

The existing models - be these Keynesian, Neo-classic or Monetarist - believe in creating market economies overnight. New Institutional Economics (NIE) includes factors constraining the behaviour of economic agents - institutions - into the corpus of Neo-classic theory and legitimates them as objects of economic analysis. Defined as the "rules of the game" by North (1990: 4), institutions constrain individual behaviour and thus define the outcomes which result from individual action (Schotter, 1986: 117).

Both formal institutions - laws and regulations - and informal institutions, such as codes of conduct, canalise individual behaviour. In a world of positive transaction costs - due to market imperfections inter alia - institutions and their design are the root of many problems in the EITs.