Caution urged on bank sale

July 29, 1999 -- WORLD Bank chief economist Joseph Stiglitz cautioned against a rush to sell off local banks to foreign players, arguing that although foreign banks would provide management skills, capital and technology in addition to enhancing competition, they are not a panacea for all economic problems.

He said there was no need to rush to sell off domestic banks to foreign players before the government fully understands the objective of doing so, or has a clear idea of how they will develop the financial sector to help the economy.

Stiglitz, a highly respected international economist, was in Bangkok to deliver a keynote address at a conference on ''Asia: Back to Basics?'' organised by the Nation Multimedia Group. In his address, he outlined strategies for enhanced productivity and equity in the East Asia countries.

He said opening up the banking sector to foreign participation depends on the real economic situation of a country, but overall it should provide competitive pressure in the system.

Stiglitz explained that if the immediate need was to acquire foreign capital so that lending can resume quickly to revive the economy, or if professional management and technology are needed to upgrade the local banking system as a whole, then the sell-off would be justified.

Otherwise, a rush to sell off local banks to foreign investors, particularly at a time of a recovery, might turn out to be simply giving away domestic assets on the cheap, he said.

In Thailand, the government has so far closed or intervened in 70 finance companies and banks and is now in the process of privatising four commercial banks.

Foreign banks, two of which already control DBS Thai Danu Bank and the Bank of Asia, are keen to get a foothold in the Thai banking sector. Until 1997, the sector had been closed to foreign competition. Yet the presence of foreign bank branches has not really created a competitive environment either, for they have been charging their customers even wider interest rate spreads than the local banks.

Stiglitz cited New Zealand and Argentina as two countries which have sold off their banking systems to foreign interests. The system was not working well in Argentina, however, because the foreign banks overlooked the small, local customers and concentrated their business on serving the multinational companies, he said.

As for the service of the foreign banks, Stiglitz related a personal story. Some time ago in Kenya it took him more than an hour to get cash at a British bank, while he physically had to struggle to get to the front of the line. It also took three weeks to clear cheques through the foreign banks in Kenya.

''International banks are not a panacea,'' he said.

In the event of less competition from the foreign banks, improvement in the local banks can be made by hiring professional management or getting consultants from outside, while awaiting for the local buyers to get into the scene.

Stiglitz said he would like governments to make sure that credit is distributed fairly across the broad spectrum of the economy so that the less privileged sectors are not left behind. This, he said, can be done by requiring banks to set aside a fraction of their lending portfolio to the poorer sectors.

Although the financial sector is in need of drastic restructuring, most people do not necessarily share the same view of what restructuring actually means. Stiglitz said there are temptations for some Western firms, who would like to buy assets on the cheap, to look at restructuring as a means of asset stripping.

Stiglitz recounted a case in Korea where the authorities were interested in selling off a local bank to a group of US institutional investors. A preliminary signing ceremony had been completed, but when the time for payment came, the US side wanted to bargain the price down.

The Korean authorities, who wanted to stick to the original deal, argued that they should fetch a higher price because of the recovery in the Korean economy.

But a threat had been issued. If the deal was not completed, word could be spread that Korea was dragging its feet on financial and economic reform.

BY THANONG KHANTHONG