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Reforms, Incentives and Banking Sector Productivity: A Case of Nepal

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Abstract

We model banks as profit-cum-utility maximizing firms and study, inter alia, bankers incentives (optimal effort) and incentive driven productivity following deregulations. Our model puts to test a panel of Nepalese commercial banks which went through deep financial reforms in the recent past. We find that (i) bankers efforts and productivity have notably improved in Nepal, (ii) bankers efforts significantly explain the banking sector s productivity, (iii) the proportion of non-performing loans has considerably declined, and (iv) banking services have become costly, although the bank spread has moderately declined. Our approach is different from the widely used data envelopment analysis (DEA) of bank productivity, hence complements the literature. It also informs the current policy debate in Nepal where the Central Bank is seen to be geared towards regulating the financial system and micro-managing the banking institutions.

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  • Luintel, Kul B & Selim, Sheikh & Bajracharya, Pushkar, 2014. "Reforms, Incentives and Banking Sector Productivity: A Case of Nepal," Cardiff Economics Working Papers E2014/14, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2014/14
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    More about this item

    Keywords

    Reforms; incentives; productivity; panel integration; cointegration; simulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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