Importance of Bank-level Study

Another important contribution of this study was to see the relationship of excess liquidity and financial liberalisation using various bank-specific characteristics. While most of the studies on excess liquidity problem were done on a specific country at an aggregate level (e.g. Agenor et al., 2004; Fielding and Shortland, 2005; Chen, 2008; Zhang, 2009; Yang, 2010; Aikaeli, 2011), very few examined this at a cross-country level. Most of cross-country studies were done on Africa (Saxegaard, 2006; Khemraj, 2010).

According to our knowledge, there was no study on excess liquidity and financial liberalisation at bank-level. In this respect, a study at bank-level could provide important findings for the persistent excess liquidity. Bank- level study could shed important light on how banks behaved in terms of excess liquidity at bank-level. The bank-level study allowed us to look for differences according to different typology of banks. Hence the evolving pattern of excess liquidity with the process of financial liberalisation could be seen more specifically for these different typologies.

The banks in Bangladesh have diverse characteristics and on the basis of various criteria, could be classified into different groups. Based on the existing literature, banks were classified according to ownership (whether owned by the government or privately), size (if they were large or small), mode of operation (whether Islamic or conventional/otherwise) and age (whether new or old). Using data at bank-level, this study attempted to investigate if banks behaved differently in terms of excess liquidity according to these characteristics17_.

This approach could shed important light on the behavioural and operational characteristics and effectiveness of the different types of banking system within a same country and how they adapted and benefitted from financial liberalisation. Antwi-Asare and Addison (2000) observed that bank-specific indicators could be important in showing the different effects of bank performance. These differences among them could have different effects of the financial liberalisation.

It was generally observed that private banks were more efficient than public banks. In a study on Pakistan, the authors used the group-wise efficiency and found that as a group, the private domestic banks had 90.5 per cent efficiency while the nationalised commercial banks had 70.5 per cent (Abbas and Malik, 2010). In another study on Ghana, it was found that the state-run banks were not prepared to take as much risk when lending as the private banks (Antwi-Asare and Addison, 2000). The authors observed that the performances of the private banks were higher than the state-owned banks in terms of profitability, intermediation and operations. However, the above view was not always found to be true. Das and Drine (2011) found that public sector banks were more efficient than the domestic private banks in India.

17 _{In this study, the foreign commercial banks could not be included due to lack of bank-}

level data for foreign banks operating in Bangladesh. Bureau van Dijk – producer of the Bankscope database, which is one of the most comprehensive database of banks operating throughout the world and is the main source of data for this study – was contacted directly but they confirmed that they did not have data at bank-level for foreign banks in Bangladesh.

Generally it was seen that new banks performed better in times of financial liberalisation. One possible reason, mentioned by Kraft and Tirtiroglu (1998), was that since they were not held back by overstaffing or bad loans. However, the empirical results did not always support this view and in some cases it was found that old banks performed better than the new banks. One possible explanation could be their advantage in terms of size and experience, helping them to work nearer to efficient scale and at a comparable or better level of managerial efficiency than the new banks (Kraft and Tirtiroglu, 1998).

The possible effect of financial liberalisation on Islamic banking was still ambiguous. On one hand, there was perception that Islamic banks could not take full advantage of the financial liberalisation as they were comparatively small, narrow in focus and mostly vulnerable to financial shocks. On the other hand, it was also believed that Islamic banks were able to cope better with the vulnerability and the fragility caused by the financial liberalisation. So, whether financial liberalisation had a positive effect on Islamic banking remained inconclusive (Bashir, 2007).

Inability to reach a definitive conclusion was also evident when the possible effect of financial liberalisation on bank size was analysed in the literature. Some argued that large banks performed better in times of financial liberalisation (Berger and Humphrey, 1997; Yildirim, 2002; Andries and Capraru, 2013). The main possible reason for this was the market power of ‘larger banks’ and their ability to diversify credit risk in an uncertain macroeconomic environment (Yildirim, 2002). Nevertheless, some others had observed that smaller banks were more efficient than the larger ones (Leong and Dollery, 2002). This “could be due to their higher flexibility, which allowed them to adapt to changes in the banking industry brought about by the financial liberalisation programme” (Ataullah et al., 2004). Therefore, it would be interesting to see if these differences in characteristics in the banking sector had any effect on excess liquidity. Guha-Khasnobis and Mavrotas (2008) mentioned that country-specific

studies could be very useful for a more in-depth analysis. Therefore this study would analyse these aspects of ownership, size, mode of operation and age of the banking sector in Bangladesh.