Effectiveness of Central Bank's Monetary Liberalization Policies in the Banking System in Libya - Research Proposal Example

The Role of Central Banks in Enhancing the Banking system Performance Capa in the Light of the Financial Globalization Challenges: “An Applied Study of the Banking System in Libya” Introduction Under the age of globalization, banking sector all over the world has been changing rapidly. While globalization in the financial sector has provided various opportunities of the bank, be it international or domestic, it has also posed a number of challenges to the banking industry. In this liberalized era when domestic financial markets are integrating to form a huge international market, the banking industry, the major pillar of the financial sector, needs to evolve accordingly. Now in any nation, central bank is the principal monetary authority of the country which is responsible for maintaining financial stability throughout the nation. In the era of globalization most of the countries use the strategy of deregulation to reduce the government control on the domestic industry. Banking sector has also not been left alone. Governments are also exercising lesser amount of control on the banks. But to ensure that the banks are performing efficiently, the Central bank has a big role to play. It is the central bank of a nation in whose hands there lay the responsibilities of creating favorable environments for the bank to operate under. Efficiency of the banks in a country depends on the efficiency of the strategies adopted by the central bank of the country. When a nation adopts the strategy of increasing openness, its economy goes through a substantial change as the domestic market of the country becomes exposed to international market and therefore to fierce competition from international firms. Under this situation central bank of any country needs to make cautious steps in order to make the domestic banks strong enough to survive under strong competition as well as creating favorable environment for the operation of international banks. Particular in developing countries, central banks have to be very efficient in deal with the continuously changing financial environment under intense liberalization. Unless and until the central bank becomes successful in fulfilling its major objective of maintaining financial stability, the country’s financial sector will move towards severe financial turmoil. (Papademos, 2008) Libya, a developing nation of Africa, has significantly participated in the process of globalization. Its banking sector has therefore been also not left alone. Intensive reform measures have been undertaken for the baking industry of the country to pave the way of integration of domestic banking sector with the global one. But here lays a big question regarding how far the banking industry of Libya will be successful in the era of globalization? Now the level of performance of the banking industry of Libya has something to do with the strategies of the Central Bank of Libya. (Papademos, 2008; Central Bank of Libya, n.d; Modernizing the Libyan Banking System to Promote Economic Growth and Development. n.d) Since like in all other countries banking sector is the major pillar of the Libya’s economy, and the central bank assumes the responsibilities of maintaining financial stability, it would be quite interesting to examine the role that the Central Bank of Libya has played in enhancing the performance of the banking sector of the nation in the era of intensive liberalization. Review of Literature and identification of the problem For identifying the problem that the proposed research wants to address on a more clearer terms, it is necessary to build some idea on the broad issue under consideration. Before moving on discussing the common problems that banking industry faces in the globalised world, the existing banking system of Libya, the challenges it is facing, different types of policy measures that have been undertaken by the central bank of the country, the problems with the central bank of any country in addressing financial issues, it is first necessary to understand what globalization is all about and why it has become so important to consider for strategy making in any industry. Technically speaking, the word ‘globalization’ refers to the process through which the world community gets integrated into a common economic or social system. In other words, it is a process of integrating local and regional aspects into global ones. Globalization does not refer to integration in one particular field only. Instead, this term is used to imply socio-cultural, economical, political as well as technological integration at the same time. However, frequently, the term globalization is used to refer to national economies’ integration into a global economy by flows of foreign direct investments, trade, flows of capital goods, the process of migration and technology transfer. When an economists use this term, then by this word he wants to imply removal of national barriers for facilitating the flows of goods and services, labor and capital from one country to another. (Bhagwati, 2004; Steger, 2003) The process of globalization has got a momentum in the past two or three decades. In the last two decades technology has made a huge progress and made it very easy for people to travel, communicate or conduct businesses at an international level. In recent times two major forces that are responsible for speeding up the process of globalization are the huge advancements that are made in the filed of telecommunications and development of internet. (Steger, 2003) There exist varied opinions on whether globalization is a new phenomenon or not. Some people are of the opinion that globalization is completely “a new epoch of human history in which traditional nation states have become unnatural, even impossible business units in a global economy” (Held and McGrew, 2000, pp-3). There however, exists a completely different view regarding globalization. There is a group of people who does not consider globalization to be a completely new phenomenon. This group is known to be as skeptics. Skeptics are not at all ready to accept that globalization is a new phenomenon and that globalization is not historically unparalleled. According to the skeptics, globalization has a long history. An important thing regarding the argument of the skeptics that globalization is not new is that they expressed their views based on some statistical evidences. While arguing that globalization has a long history they have relied on a number of statistical evidences on trade flows at an international level, world flows of investment and migration of labor from one country to another that have been taking place between predominantly national economies since the initiation of West state centric world system. (Held and McGrew2000; Williamson, 2002) A major part of globalization is liberalization of the financial sectors of the economies. While financial sector reforms bring about several opportunities for the banking industry by expanding the market and providing diversified customers, it also intensifies the degree competition as more and more private banks and foreign banks start to come into the picture. Under intense liberalization in the financial sector declining rates of interest and lower level of lending margins throw up new challenges to the banking industry, particularly for those banks which are operating in the public sector of the economy. Under such a challenging environment, banks have to equip themselves with adequate level of expertise to operate efficiently. ( Viswanathan, G. n.d.) Major global challenges that the banks require to meet properly to survive under fierce competition are as follows: Enhancing customer service. Incorporating various technological innovations. Improving the system of risk management Introducing wide diversification in the product range. (Viswanathan, n.d.) To meet the challenges described above, international banks has undergone a number of developments like adopting merger or acquisition strategies in order to enhance market power and customer base as well as to borrow technical expertise of the partners, introducing different types of new financial instruments to become more active financial intermediaries instead of being only passive fund mobilizer of the economy. (Bhat, n.d.) For international banks it is relatively less tough to enhance its efficiency even under intensive globalization as they are already a part of the global market. But for the domestic banks the problems are more serious. To maintain its sustainability under huge global competition where they have to compete not only with other domestic firms, but also with the international market players who have already obtained a good global standard, a domestic bank in most of the countries, particularly in developing countries like Libya, meets a huge number of challenges as follows: Enhancing the ability of financial intermediation so that it can more efficiently intermediate between investors and savers can effectively determine prices of financial products and allocate the resources of the economy appropriately. In the emerging market scenario, the norms of disclosure and transparency are becoming more and more important. Hence, domestic banks have to be more responsive as well as more accountable to their existing as well as potential investors. To compete with already established international banks under a liberalized environment, the domestic banks also need to adopt international standard to keep their existing customer base a swell as to attract new customers. Spectacular development in the information and communication technology is perceived to be a major determinant of productivity growth. Incorporation of IT under banking network results in reduction in the operating costs, increase in volumes of services offered as well as increase the product range. (Bhat, n.d.; Peek, and Rosenberg, 2000) The major obstacles in the path of meeting these challenges in most of the countries, including Libya are several types of legislation and laws imposed by Central Banks, weakness of banking structure as a whole, reluctance in spending high costs for the implementation of advanced technology, existence of numerous small or medium sized banks within the banking structure. (Bhat, n.d.) Hence, to meet all these challenges, efforts only on the part of a single bank is not enough. The environment in the banking industry as a whole has to be made favorable for these developments to take place. Here comes the role of Central bank. It is necessary for a central bank to adopt such steps that will help in meeting the challenges discussed above. But very often, central bank falters in playing its role appropriately by adopting not so effective strategies. For example, very often central banks, particularly in developing nations, still follow old and traditional control tools. However, as far as Libya is concerned, the Central bank of Libya has taken some steps to modernize its banking sectors so that it can meet the challenges of the globalized era. For example, in 2006, to modernize the banking industry it has adopted the strategy for increasing openness for gathering experience, enhancing skills and borrowing advanced technologies from foreign banks. Very often, the strategy adopted by the Central Bank of Libya for modernizing its domestic banking system is termed as a well functioning, healthy and well capitalized financial system that is well regulated and supervised, contributes to the overall growth of the economy, and satisfies Libyan customers’ financial needs by offering quality products and services”. To achieve its goal, the Central has strengthened the level of competition in the domestic market by inviting more and more foreign investments in the sector, adopted improved strategies of risk management by exercising better supervision and better internal control, and finally by enhancing the level of customer services through improving product quality. (Modernizing the Libyan Banking System to Promote Economic Growth and Development. n.d; Banking Sector Reform in Libya, n.d.) As far as the issue of central banking in the era of globalization is concerned, there exist a few studies in this area. For example, some studies have attempted to find out the ways through which central bank would be able to improve the performance of the entire banking industry under the new challenges posed by globalisation. Most of these studies have agreed on the aspect that Central banks, particularly of developing countries have to adapt themselves to the new challenges. For example, Ahumada and Marshall (n.d.) in their study on the banking industry in Chile have talked about three developments in the policies adopted by Chile’s Central in respect of financial integration at a global level, and development in financial markets. In Chile, the central bank has adopted for floating exchange rate since 1999. According to the researchers, this policy was mainly undertaken to improve the performance of the economy as a whole which will in turn automatically improve the performance of the banking industry of Chile. This policy results in reduced interaction between central bank and other commercial banks in the foreign exchange market. Floating exchange rate regime has also encouraged private sector to increase their international assets which in turn led to a reduction in percentage of international assets held by banks. This simply resulted in decrease in the concentration of banking industry in foreign exchange market. Along with entering into a floating exchange regime the central bank of Chile introduced electronic open market operation system which has increased the competitiveness of the commercial banks as central bank of Chile can now instantly discover any anticompetitive activities in the inter-bank market for liquidity. As far as the issue of financial market integration on an international scale is concerned, it has provided the banking industry the access to diversified financing opportunities in one hand, while on the other hand it has lessened freedom of the banking firms along with other financial corporations to exercise their market power. In another paper (Marshal, 1998) on Chile’s banking industry similar types of findings have been revealed. There, however exists very few works on evaluating central bank’s performance in enhancing banking sector performance under new global challenges. Particularly, in the context of Libya no such rigorous work exists. Hence it would be quite interesting to examine performance of Libya’s Central bank in enhancing banking sector performance in the era of globalization. Thus the question here is that how far the Central bank has been able to enhance the performance of the banking industry of Libya under intense globalization through its initiatives. So the research problem is examining the efficiency of Libya’s central bank in meeting the challenges of the new economy. Hypothesis Looking at the research problem it is now possible to state the hypothesis that the research will test is as follows - The Central Bank of Libya has played a positive role in enhancing the performance capacity of the banking system of Libya by positively meeting the globalization challenges. Objectives and importance of the study The objective of the study is to find out the effectiveness of central bank’s monetary liberalization policies on the performance of the banking system in the context of a developing country like Libya. Liberalized monetary policies and increasing the level of financial openness is one of the most vital issues facing almost all the countries across the world. Realizing the need for modernizing its banking sector, the central bank has adopted various reform strategies. Now if the study founds that the policies adopted by the Central Bank have actually helped to enhance the banking system’s efficiency, then this results might encourage to more intensively embrace the strategy of monetary liberalization. If Central Bank of Libya is found to have played positive role in increasing performance capacity of the entire banking system it might also encourage other developing countries which are still in doubt regarding the implementation of intensive financial liberalization policies to adopt these strategies. Method To test the hypothesis stated above, the proposed research will adopt an exploratory as well as an analytical approach. To examine the impact of the monetary and financial policies of the Central Bank on the performance of the domestic banks of the nation in terms of its capacity in financial intermediation, payment services, ownership issues etc. Qualitative research technique will be applied for the selected sample for the research where banking personnel will be asked their viewpoints on these issues. Apart from these to measure the impact of monetary and financial policies of the Central Bank on operational and productive efficiency of the banks, a statistical analysis will be performed. To measure their operational efficiency profitability indicators will be taken into account. Once the values of the indicators are obtained, a regression analysis can be performed with a dummy variable representing the change in the monetary polities of the central Bank. A chow test can be performed to check whether the policies adopted for modernizing the banking sector in 2006 have been effective in terms of bringing about huge positive changes after that period. For the purpose of this study it would be appropriate to incorporate all the existing banks in the country. Since the banking industry is not very huge comprising only five state owned commercial banks, one privately owned commercial bank and forty eight national banks (Country Perspectives- Libya- Finance and Banking System, n.d.). However, for the sake of convenience a smaller sample can also be taken by not incorporating all the national banks. Among the forty eight national banks twenty banks will be selected randomly for minimizing the sampling error. Hence the sample for the study will comprise five state owned commercial banks, one privately owned commercial bank and twenty national banks. References: 1. Papademos, L. 2008. Globalization and central bank policies. Available at http://www.ecb.int/press/key/date/2008/html/sp080122_2.en.html [accessed on 6th July, 2009] 2. Central Bank of Libya. n.d. Monetary Policy. Available at http://cbl.gov.ly/en/home/index.php?cid=71 [accessed on 6th July, 2009] 3. Modernizing the Libyan Banking System to Promote Economic Growth and Development. n.d. available at http://www.libyaninvestment.com/article/2007-07-25-15.php [accessed on 6th July, 2009] 4. Peek, J. and Rosenberg, E. 2000. Implications of the Globalization of the Banking Sector: The Latin American Experience - history of Latin Americas experience with foreign banks - Statistical Data Included. New England Economic Review, available at http://findarticles.com/p/articles/mi_m3937/is_2000_Sept-Oct/ai_80855423/?tag=content;col1 [accessed on 6th July, 2009] 5. Viswanathan, G. n.d. Global Challenges In Banking Available at http://ezinearticles.com/?Global-Challenges-In-Banking&id=1092590 [accessed on 6th July, 2009] 6. Bhat, S. n.d. Managing Challenges in Banking Industry. Available at http://www.indianmba.com/Faculty_Column/FC173/fc173.html [accessed on 6th July, 2009] 7. Banking Sector Reform in Libya. n.d. available at http://finance.mapsofworld.com/economy-reform/libya/banking-sector.html [accessed on 6th July, 2009] 8. Country Perspectives- Libya- Finance and Banking System. n.d. available at http://www.animaweb.org/en/pays_libye_financesbanques_en.php [accessed on 6th July, 2009] 9. Bhagwati, J. 2004. In Defense of Globalization. Oxford, New York: Oxford University Press.  10. Steger, M. 2003. Globalization: A Very Short Introduction. Oxford, New York: Oxford University Press. 11. Held, D. and McGrew, A. eds. 2000. Global Transformation Reader: An Introduction to the Globalization Debates, Malden, Mass: Polity Press. 12. Williamson, L. 2002. Globalisation: world-changing or word-changing? Available at http://www.guardian.co.uk/world/2002/oct/31/globalisation.g8 [accessed on 6th July] 2009. 13. Marshall, J 1998.Preventing bank crises: lessons learned from the Chilean experience., in Caprio, G., Hunter, W., Kaufman, G. and Leipzinger, D. (ed) Preventing bank crises: lessons from recent global bank failures. EDI Development Studies 14. Ahumada, A. and Marshall, J. n.d. The banking industry in Chile: competition, consolidation and systemic stability. Available at http://www.bis.org/publ/bppdf/bispap04b.pdf [accessed on 5th August, 2009] Read More