SANEI: Ongoing Studies

Foreign Direct Investment in Financial Services: Impact on Nepalese Economy

Role of financial services are clearly understood for promoting the investment and efficiency of the market economy. In spite of the economic liberalization since 1990 and opening of financial services while acceding the World Trade Organization in 2004, the foreign direct investment (FDI) in financial services is very limited in Nepal. Several terms and conditions are imposed upon FDI in financial sectors. The study is proposed to analyse the financial profitability and economic impacts of the financial sector FDI. It also analyses the impact of joint venture financial institutions to the employment and income. A census of the joint venture financial institutions will be done and equal number of domestically invested financial institutions will be sampled randomly for comparison. A sample of 100 mid level employees of sample institutions will be surveyed. Financial profitability and economic benefits will be assessed using cost-benefit analysis like benefit-cost ratio, profitability ratio and internal rate of return. Net income gain to labour from foreign equity investment will also be estimated. The results will be useful to develop the financial reform policies suitable to promote the domestic and FDI financial services in Nepal.

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Development of Financial Institutions in Nepal.

This study, Development of Financial institutions in Nepal, is concerned with the (recent) development of the structure of Nepalese financial institutions - formal and informal. It will generate academic as well as policy implications, and will be the first of its kind in the country.
This (empirical) study will integrate quantitative and qualitative approaches in the generation of information on financial institution of Nepal- the structure and performance of financial institutions, and experiences as well as perceptions of key stakeholders - policymakers and implementers/Managers regarding the financial institutional development. Thus the financial information will be collected, collated, and triangulated to obtain pertinent issues and implications for future course of academic research and policymaking as well as implementation. This exercise will incorporate pertinent experiences and lesions learnt from other countries, especially from the South Asian ones. It is expected to contribute to the development of a sound financial development in Nepal.

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Financing the Higher Education in Nepal

The higher education development in a pragmatic way would lead to a sustained and rapid development of a nation. It would lead to the requirement of additional financing for higher education. Besides, the intense competition for financing of other sectoral activities and poverty alleviation programs limits the finance for the higher education. Thus, the financial constraint has emerged in the higher education. Moreover, the enrollment in higher education has increased rapidly over the years, which puts pressure on limited finance. So, the government is gradually reducing the share of the government in financing the higher education. In this respect, the study on the financing the higher education has become indispensable. The broad objective of this study is to analyze the higher education financing in Nepal.

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A Comparative Study of Graduates (in 2002 and 2003) and Job Markets from Public and Private universities/colleges in Nepal.

Education is one of the most well developed social services in Nepal. Though many tasks still remain, the tremendous expansion that education has achieved during the last two decades is highly impressive in itself, and in fact education has been a major growth sector of the economy. Within education, the fastest growth in terms of both enrolment and expenditure was achieved by higher education.
Nepal has only about one hundred year's history of higher education. In 1918, Tri-Chandra campus was established as a first higher education institution in the country affiliated with Patna University, India. In 1969 Tribhuvan University was started as first University run by government sector. After its establishment there were lots of colleges were established in different parts of the country affiliated under tribhuvan University. In 1985 another Government University was established Mahendra Sanskrit Univesity especially focused on promotion of Sanskrit education. Later, Kathmandu university was founded by the private sector. Now, there are two more private Universities providing education in the country. Now, all public and private universities provide intermediate graduate level and master level education.
In recent year the expansion of higher education is growing rapidly. But expansion is not sufficient: one must ask whether the structure and pattern of higher educational development has served the community. It has been the general complaint that in developing countries like Nepal, there are small clusters of highly developed regions and large backward areas. This phenomenon of dualism is also seen in higher educational development. Metropolitan centers are the sites of a large number of over-crowed colleges and universities while the moffusal (out of capital) areas have few institutions of higher education with inadequate enrolment. Though in the course of continued higher educational expansion, inadequate enrolment in some institutions may be considered to be only a passing phase, certain socio-economic factors are in play which govern the particular regional pattern of higher educational development, e.g. the imbalanced development of the labour market for graduates (Bista, 2001).
Thus, the question of the nature of the link between the job market and graduate supply assumes a great significance in any study of trends in the development of higher education. How does the job market assess graduates, i.e. does it vary depending upon the labour market and the university graduates particularly their public and private character? How do the graduates themselves assess the job market?
In this light of this direct and reciprocal assessment, would it be possible to evaluate higher education? What do employed graduates feel about their education when they look back? This self-assessment in retrospect should provide useful insights for introducing structural reforms. The experiences of graduate unemployed would provide important supplementary inputs. A macro analysis of graduates unemployment conceals a number of subtle aspects of the problem, for it is often devoid of the subjective touch" which is so important. It is possible that it is neither the higher educational sector nor the job market which is the cause of unemployment, but rather certain personal factors like location preferences, rigid job preferences, preference for the public sector, etc. which are the crucial elements. More precise matching of numbers at the macro level would not ensure perfect equilibrium between education and the job market if the various personal preferences of the job aspirants were overlooked. These subjective aspects may well be different for graduates of public and private universities (Panchmukhi, 1987).
Thus, this study will make separate but comparative analysis of the situation of job markets for public and private University graduates.

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Financial Sector Reform and Public Ownership of Financial Institutions

Finance constitutes a blood line of every investment activity. A responsive and efficient financial sector is needed for effectiveness of such activities. Given the weaknesses of the banks, Nepal initiated financial sector reform program. The improvements that it has brought about and the lessons learned would be pivotal in further extending the benefits drawn so far.
It is in this regard a study is proposed to examine the reform against the emerging questions that are critical in extending the benefits. The proposed study seeks to generate the understanding of the intricacies of transformation that would provide a useful insight in identifying and extending the best practices.
The analytical research making empirical study at customers and end-users perspective is expected to make a significant contribution in this regard.

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Assets as Liability?: NPAs in the Commercial Banks of Indian and Bangladesh Compared

Due to the social banking motto of the Government, the problem of non-performing asset (NPA) was not considered seriously in India in the post nationalization (of banks) period. However, with the recent financial sector liberalization drive, this issue has been taken up seriously by introducing various prudential norms relating to income recognition, asset classification, provisioning for bad assets and assigning risks to various kinds of assets of a bank. While the Reserve Bank of India (RBI) as well as the banks have begun to pay considerable attention to the NPA problem, there are only a limited number of rigorous studies in the Indian context that look at this issue in some detail. In this project we attempt to look at the determinants of NPA (using a panel data model with a cross section of over 100 banks) by examining some of the external and internal factors like extent of competition, total assets of a bank, size of operations, proportion of rural branches , investment, etc., that can influence NPA. It is of our interest to examine, between various bank groups (viz, SBI, Nationalized banks, Private banks and foreign banks), which is the most efficient group in the context of recovery of loans and what are the factors that determine this efficiency. For determining efficiency of the different banks in their loan recovery effort, the concept of technical efficiency will be applied, using a frontier production technique (Bettesse and Coelli (1995)).
To have a micro perspective of the problem, we are interested in examining the factors that have influence on recovery of loans in small-scale industries sector of the Indian economy. While strategic behaviour of the stakeholders in the agricultural credit market has been well explored, SSI sector has not received much attention in this regard. In this exercise therefore, we are interested in studying the possible strategies available to the different stakeholders (viz., banks, SSIs, large subcontracting firms) in a game theoretic framework and examine the optimality of different strategic moves.
In recent years Bangladesh Bank has been trying to bring prudential norms in line with best international practices. The Central Bank on several occasions defined the Non-Performing loans/leases via its circulars in 2002, 2005 and 2006. Similarly the Central Bank also push for legal changes and established the Money Loan Court in 2003 to change the culture of loan default in our banking sector. In addition, the Central Bank itself implemented a strengthening of its capacity to enhance its own supervising role. In terms of non performing loan in Bangladesh, it came down from 35.6% in 1999 to 18.8% in 2003. There are, however, variations in the performance by types of banks. Though NPL as a percentage of total lending declined, the volume of NPL remained a major concern of the banking sector of Bangladesh. While the origin of the problem of high level of NPAs lies in the quality of managing credit risk and the extent of preventive measures adopted, various factors like real interest rates, directed credit or inflation rate, macro-economic stability, can also effect the level of NPLs. It is important to note that there was no major research on this issue. Further, the Central Bank data shows that nearly 51.4 percent of the NPLs are in the micro and agricultural loans.

Privatization and Internationalization of Higher Education in the Countries of South Asia: An Empirical Analysis.

Despite common origin and similar academic and affiliating structure, higher education in countries of South Asia has evolved in different ways. Currently there are significant differences amongst them. With low levels of participation varying from 1.5 percent in Afghanistan to over 11 percent in India, there is large unmet demand due to young population, rapidly growing economies and rising aspirations. Overall enrolment is likely to increase to over 50 million by 2025 (more than enrolment in all OECD countries together) from a little over 15 million currently. Public higher education suffers from capacity constraints and lack of variety and quality. Growing demand is, thus met partly by the growing private sector –mainly but not exclusively though the domestic providers, and a growing number of students going abroad. Private higher education that emerged in the 1980s and 1990s in all countries of the region (except Bhutan and Afghanistan) is gradually moving from periphery to a dominant position. Private share exceeds a majority of other countries for which such data is available. Like elsewhere in the world (except the United States), the private institutions are secular, demand absorbing, vocationally and commercially oriented. Though, there are concerns about equity, quality and exploitative behaviour of the private sector, but now both public and private provision are seen to meet the growing demand and there is less of public-versus-private debate. Foreign presence is peripheral and mainly an adjunct to the growing private sector. Independent campuses of foreign universities are rare, partnerships are common. Prestigious universities are cautious and content with merely setting up research centres to provide their home students an exposure to the rapid changes in the region. Most partnerships are with second-tier foreign universities that vie with each-other to tap the huge potential here. Regardless of expanding domestic capacity, many students go abroad for higher studies. While most students go to advanced countries, a growing number is now going countries like Malaysia, Singapore and China that are emerging as global magnets for international students. Student mobility within the region – largely to India, is small and declining. Similarly, despite India’s dominant presence in higher education system, its influence in shaping higher education in the region is marginal. There is large scope to benefit from complementarities. Setting up of South Asia University is the first step; the next logical step would be to create South Asia Higher Education Area (SAHEA) on the pattern of the Europe Higher Education Area (EHEA) for deepening the regional integration efforts. This would make higher education and research in South Asia competitive in the growing global knowledge economy.

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Household Financing of Higher Education: An Analysis of Household Investments, Access, Participation and Equity in Indian Higher Education

The 1990s have seen a major turn in the history of contemporary higher education in India. Ever since the Government of India adopted structural adjustment policies, conveniently referred to as Economic Reforms, associated with the World Bank and IMF in 1990, privatization has been pursued as the most significant agenda for improving efficiency and easing financial pressures on the State kitty in all sectors of the economy including higher education. In 1998, the Government of India in its White Paper on Subsidies declared Higher Education as a Non-Merit Good, thereby compelling the households to shoulder an increased financial responsibility for the higher education of their wards. There is a need to study the extent to which the complex Indian society is adjusting to this changing scenario and understand the impact of the changing policies and practices in Financing of Higher Education on the household investment choices in higher education. There is also a felt need to understand the dynamics of household financing of higher education and the implications of the same to access, participation and equity in higher education courses. In the light of this felt need, it is proposed to make a study of the dynamics of household financing of higher education in India through a primary survey of 5 metropolitan cities in India and of selected district and taluk head quarters in the state of Karnataka and probe the issues related to Matrix of Private/Public mix in Higher Education, equity in and access to higher education and the role of State in provision and financing of higher education. It may be noted here that the proposed study would attempt to capture 1, 2, 4 and 6 of the research areas suggested by SANIE.

Financial Sector Reforms and International Trade Competitiveness: A Case Study of Pakistan.

Traditional theories of international trade focus on comparative advantage and factor endowments concepts. The link between financial development and international trade has rarely been investigated in the literature. Kletzer and Bardhan (1987) highlight the contribution of some aspects of credit market imperfections to inter-country difference in patterns of specialization and trade. They show that even when technology and endowments are identical between countries and economies of scale are absent differences between countries in the domestic institutions of credit contract enforcement under incomplete market information may lead to one country facing a higher interest rate or rationed credit compared to other countries. This may lead to differences in comparative advantages in processed goods requiring more finance. They presumed that more sophisticated manufactured finished products require more credit to cover selling and distribution costs than primary or intermediate products. They show that countries with a relatively well-developed financial sector have comparative advantage in industries and sectors that rely more on external finance.
Over the last few decades researchers have shown that financial sector development plays significant role in economic growth. Reforming the financial sector may have implications for the structure of international trade if the level of financial development is a determinant of a country’s comparative advantage as Kletzer and Bardhan (1987) highlighted. Thus, the effect of trade reforms on the structure of international trade might depend on the level of a country’s financial development. Recent study by Fanelli and Medhora (2002) vindicates the argument of Kletzer and Bardhan (1987) by finding that comparative advantage is positively effected by the financial sector development.
There has been no attempt so far to analyse the relationship between the financial development and international trade competitiveness for the case of Pakistan. This study is intended to fill this gap by exploring the role of financial development on international trade for the case of Pakistan.
In Pakistan, focus of trade policy started shifting from import substitution to export promotion since the decade of 70’s. In 1988, Pakistan signed a Structural Adjustment Programme with the IMF to address its balance of payments deficit problems which required an emphasis on greater liberalization of both imports and exports. The abolition of trade barriers moves resources to the products in which country has a comparative advantage. At the backdrop of the heroic works by McKinnon (1973) and Shaw (1973), empirical studies in favour of financial liberalization, and conditionalities put by international donor agencies; process of financial restructuring was started in 1980s by most of the developing countries including Pakistan.
While there are several links between financial development and international trade, this study intends to explore the ability of the financial sector to channel savings to private sector to help overcome liquidity constraints and raise the international trade competitiveness.
The rest of the proposal is structured as follows. In Section 2, we review some of the theoretical and empirical research already conducted relating financial development and trade competitiveness. In Section 3, we discuss the methodology we intend to utilize for analyzing the finance-competitiveness nexus for Pakistan

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An Empirical Analysis of the Combined PPP and UIP: Evidence from South Asia.

Since the last few years, both financial reforms and trade liberalization are at the great concern of economic policies. Forex markets have an immediate and direct impact on citizens. Economies that rely strongly on remittances of overseas contract workers or tourism are quite sensitive to forex rate instabilities. A competitive exchange rate is the sign of growth process via positive impact on foreign investment and balance of payments. Interest rate also plays a very important role, as an instrument of monetary policy, to promote the saving and investment. Therefore, the role of foreign exchange and interest rates with price stability in policymaking has been increasing in emerging and developing economies
Of particular interest to a central bank is whether interest rate liberalization affects the behavior of the exchange rate market with price levels that is one other crucial determinant of exchange rate. In thinking about this phenomenon the reader should recall that there is a natural link between the interest rate differential and exchange rate via the uncovered interest rate parity (UIP) hypothesis, and, similarly, purchasing power parity (PPP) describes exchange rate–price levels association (see Flood and Rose (2002), and Sarno and Taylor (2002), respectively).
The empirical evidence for either PPP or UIP individually is mixed. A large number of previous studies have been failed to establish a clear long-run relationship between exchange rate, interest rates, and price levels under separately PPP and UIP conditions. The failure of PPP or UIP may due to the omitting of variables (interest rates and price levels, respectively) from cointegrating vector rather than any inherent deficiency in exchange rate, price levels and interest rates associations. Therefore, the current study combines the two arbitrage conditions into a single relationship, as the empirical literature is more supportive of such a combined relationship than of either PPP or UIP separately. For example, Johansen and Juselius (1992), Juselius and MacDonald (2000), and Caporale et al. (2000), among others, have been provided empirical evidence for international parity conditions by modeling PPP and UIP jointly.
Moreover, under rational expectations, deviations from PPP and UIP will determine exchange rate expectorations, thereby providing a link between the goods and capital market (see for details, Juselius (1995)). A multivariate cointegration procedure is employed to explore the long-run linkage between domestic exchange rate, domestic and foreign price levels, and domestic and foreign interest rates for South Asian countries. The exchange rates are bilateral rates against the U.S. dollar, designating the United States as the “foreign country” in this study. Estimated relationship enables us to determine whether prices, interest rates and the exchange rate were consist with PPP and UIP over the examined period. Knowledge of the forex rate determinants is important not only to policy makers and macroeconomic managers in government and banking sectors but also to individual businessmen and consumers.
This paper attempts to investigate the long run relationship between the exchange rate, interest rates and prices. The main objective is to identify whether the determination of the nominal exchange rate is consistent with the UIP-PPP conditional equilibrium or there are some other factors, which are deriving the exchange rate away from conditional equilibrium.

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Financial Sector Reforms and the Efficiency of Banking in Pakistan

The banking in Pakistan has been dominated by government owned institutions. It has accommodated the financial needs of the government, public enterprises and private sectors (Khan, 1995; Khan and Khan, 2007). Public sector dominancy, among others, lead to inefficiency in the banking sector (Haque, 1997). The economic efficiency of the banks remained low that led to low savings and investment in the private sector which resulted in low growth (Khan and Khan, 2007). These problems include concentrated ownership of financial assets, high taxes, narrow range of products and have not diversified into consumer and mortgage financing (Haque, 1997 and Limmi, 2002).

A strong regulatory and supervisory system is necessary to cop with the financial crises and promotes the efficient function of financial markets (Caprio and Klingebiel, 1997). Therefore the challenge is to formulate an appropriate regulatory framework that enables the banking system to be more resilient to insolvency. In addition timing, sequencing and speed of restructuring measures are very important for successful restructuring (Khatkhate, 1998 and Alawode and Ikhide, 1997). Moreover, the reforms of the financial system are important to remove market distortions (Eatwell, 1996; Mavrotas and Kelly, 2001; and Khan and Khan, 2007). Financial sector in Pakistan has been under reforms process since early 1990’s. The objectives of these reforms has been removing inefficiencies of financial intermediations and maintaining stability and enhancing growth (Faruqi, 2007).

In order to improve the efficiency of financial system the Government of Pakistan initiated macroeconomic and financial sector restructing program. International agencies such as International Monetary Fund (IMF), The World Bank and government of Japan provided technical support as well as banking sector adjustment loan (BSAL) in 1996. The current spell of reforms process has started in 1997. The main concern of the reforms agenda has been on the recovery of non-performing loans, retrenchment of surplus staff, closure of over-extended branches, privatization of banks, introduction of international accounting standards, strengthening prudential regulation and establishment of banking courts. During 1998 and 1999, the reform process suffered badly.

The Government of Pakistan has decided in 2000 to review the reforms program. Therefore the Government approached the World Bank to get support for revival of the reforms program. As a result the World Bank approved a credit for the Pakistan Banking Sector Restructuring and Privatization Project (PBSRPP). The main focus of PBSRPP has been to improve the efficiency of state owned banks by reducing the cost structure, complete privatization of banks, liberalizing bank branching policy, reduction in taxes, integration of national savings scheme to the financial markets, discontinuance of the mandatory placement of foreign currency deposits by the commercial banks, and strengthening the central bank to play effective role as a regulator of banking sector (Qayyum and Ahmed, 2006).

Following the guidelines provided in the agreement with the donors, the Government of Pakistan and State Bank of Pakistan has taken several steps to restructure financial sector. These include privatization of NCBs, corporate governance, capital strengthening, improving asset quality, consumer financing, legal reforms, prudential regulations, E-banking, credit rating, reduction of corporate taxation and human resource development (SBP, 2005). It was expected that these reforms will bring significant economic benefits through a more effective mobilization of domestic savings and efficient allocation of resources. There are a few studies are available in Pakistan on banking efficiency. These include Musleh-ud-Din (1996), Akhter (2002), Burki and Niazi (2003) and Qayyum and Ahmed (2006). None of these considered second generation reforms and their impact. Therefore there is a need of comprehensive assessment of the impact of financial sector reforms (especially 2nd phase of reforms i.e. 2002) on banking efficiency. It is to investigate weather efficiency of banking in Pakistan improves or not. For this purpose we used data from 1990 to 2006 for 20 domestic commercial banks.

Next section, after introduction, provides overview of status of banking and reforms in Pakistan, section three elaborates methodology and fourth section provides results. Final section concludes the study.

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Access to Higher Education in Sri Lanka.

The policy of free education in Sri Lanka since 1945 has resulted in a high rate of student participation up to the point of entry to the tertiary stage of education. In an expanding and diversifying economy , the market for those with an appropriate tertiary education also appears to be ready to expand rapidly. Nevertheless the admission to the tertiary stage has been severely restricted providing entry to only about 11% of those who become eligible for tertiary education out of which University enrollment is still lower at 3%. Among the constraints to access, an obvious one lies in the State dominated sector which does not have the financial resources to expand capacity for widening access and increasing intake. But the constraints appear to lie deeper in structural causes; the mere availability of financial resources for tertiary education as it is currently structured with its content and limited range of choice may not succeed in widening access. The primary focus of the study, therefore , will be the structural constraints arising from the rigidities of the educational system that on the one hand produce the limited range of educational choice in the prevailing tertiary system and on the other affect the capacity of students to adjust to dynamic changes in the labour market. The study will examine the effects of these constraints on the scope of GCE courses and the failure to prepare and predispose students to avail themselves of the broadening tertiary sector and the diversified opportunities for employment in an increasingly global modern sector. In this context, the private sector presents an expanding market for products from a tertiary education system that could successfully deal with the mismatch between student demand and market needs that currently prevails as a result of the selection mechanisms that are in operation. The study will investigate the two way link and interaction between inadequate resources for tertiary education and lack of diversification of tertiary education . In identifying the strategies for overcoming the constraints, it will also examine and evaluate the potential of ongoing initiatives to expand choices that are already being taken by the Universities as well as assess the efforts made by the private sector at the diversification and expansion of tertiary education .

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