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Financial Liberalization and Bank Lending Behavior in Turkey

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  • Hatice Jenkins

    (International Institute for Advanced Studies, Cambridge, Massachusetts)

Abstract

The literature indicates that financial liberalization improves the efficiency of credit allocation by reducing credit rationing. This argument, based on the availability doctrine, states that financial liberalization increases the amount of investable funds; hence, reduces the number of loan applicants that are turned down by banks. Availability of funds, however, does not necessarily create access to borrowers who were previously rationed by banks. What are critical are the lending patterns and criteria of banks that determine to whom the loanable funds are allocated. This empirical study examines how financial liberalization changed the lending behavior of banks and what implications this change has had on the efficiency of credit allocation in Turkey. The findings show that financial reforms brought modernization and market oriented management techniques that improved banks’ ability to screen their customers. However, the credit rationing attitudes of banks were not eliminated. The benefits of financial liberalization were partly offset because of the unstable macro-economic environment and the increased cost of funds to the banking sector. Liberaliza¬tion of interest rates in an inflationary environment increased the level of uncertainty and market risk that adversely affected banks’ lending behavior. Instead of financing private investment, bank credits were channeled towards low risk financial instruments, such as Government bonds and Treasury bills, short term working capital for domestic trade and consumer credits.

Suggested Citation

  • Hatice Jenkins, 1996. "Financial Liberalization and Bank Lending Behavior in Turkey," Development Discussion Papers 1996-05, JDI Executive Programs.
  • Handle: RePEc:qed:dpaper:256
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    References listed on IDEAS

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    1. Baltensperger, Ernst, 1978. "Credit Rationing: Issues and Questions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 170-183, May.
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    3. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
    4. Hatice Jenkins & Colin Kirkpatrick, 1992. "The Impact of Transnational Banks on Developing Countries' Banking Sector: An Analysis of the Turkish Experience. (1980-89)," Development Discussion Papers 1992-09, JDI Executive Programs.
    5. Mr. George Kopits, 1987. "Structural Reform, Stabilization, and Growth in Turkey," IMF Occasional Papers 1987/005, International Monetary Fund.
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    More about this item

    Keywords

    Banks; financial liberalization; allocative efficiency; Turkey;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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