1. RESEARCH CONFERENCE ON SAFETY AND EFFICIENCY OF THE FINANCIAL SYSTEM 27 AUGUST 2007 ASIA-LINK PROGRAMME Euro-Philippines Network in Banking & Finance Enhancing Teaching and Research Asialink/ASIE/B7-3010/2005/105-139

2. PHILIPPINE RURAL BANKS AND ECONOMIC PERFORMANCE Celine Crouzille Jessica Los Banos Emmanuelle Nys Alain Sauviat

3. To examine the link between financial and economic development at the regional level in the Philippines To determine the role played by rural banks in regional economic activity Objectives of the Study

4. Finance and Growth Nexus Existing studies are anchored on the argument that financial liberalization and development leads to greater capital formation and productivity, and consequently economic growth. Since these studies are often cross-country investigations, there is a need to control for institutional, social and political disparities. Focus on the Philippines at the regional level allows for a valid assumption that macroeconomic conditions and political governance are relatively homogeneous across regions in the country. Concentration on the structural differences in the banking industry among the regions, more specifically, on the special role of rural banks, to gain deeper insights into the finance and growth nexus in the Philippines.

5. Methodology and Data, Cointegration panel data analysis based on the work of Apergis et al. (2007), Christopoulos and Tsionas (2004) and Pedroni (2004): Rank-order correlation tests Panel data tests  unit root tests and cointegration tests The model is applied on four sub-samples of regions in the Philippines (all regions, developed, intermediate developed regions and less developed regions). Regions were initially classified as less-economically-developed, intermediate-developed, and developed using macroeconomic data from the Philippine National Statistics Office, National Statistical Coordination Board and the Bangko Sentral ng Pilipinas.

6. Per Capital Real Gross Regional Domestic Product

7. Bank Statistics (2005)

8. Data VariableDescription Regional economic structure PC_RGRDPPer capita real domestic regional product PC_RAgriPer capital gross value added in the agricultural and fisheries sector Financial Development (Financial depth and local intermediation) CreditShare of total net loans over nominal gross regional domestic product DepositShare of total deposits over nominal gross regional domestic product Banking office densityNumber of banking offices per capita IntermediationTotal net loans over total deposits Rural bank presence RB Credit shareNet loans granted by rural banks per region over total net loans granted per region RB Resource shareShare of total resources of rural banks per region over total resources for all banks per region

9. Estimation Results – Rank-order correlation

10. Unit Root Tests Panel unit root tests support the hypothesis of a unit root for most variables in level. For Deposit, we reject the null hypothesis at the 5% level with the IPS test and at the 10% level with ADF test.

11. Cointegration Tests To test long-term relation between financial and economic development using Pedroni ((1999);(2004)), given the heterogeneity of bank coverage and regional economic performance. PC_RGRDP = c + Financial Depth/Intermediation + RBS We use as explanatory variables: one of the two I(1) measures for financial depth (Credit or Banking office density) or the local intermediation variable, and one of the two I(1) measures for rural banks market share (RB Credit share or RB Resources share).

12. Results of Cointegration Tests

13. Long Run Estimation Results

15. The study sought to identify the role played by rural banks, as part of the Philippine financial nexus, on regional economic development data. The short period studied because of data availability, and the Asian financial crisis made it difficult to identify a long term relationship between financial and economic development in the Philippines. Conclusion

16. Our results cannot show an impact of rural banks at the national level because rural finance represents only a small proportion of the banking activity. However, in the case of the less developed regions, and when rural bank presence is relatively significant, an increase in the credit market share of rural banks strengthens the economic development of the region. Conclusion

17. Our research may encourage continuing government efforts aimed at developing the Philippine rural banking sector and in increasing the volume of investments in the regions. Policy implications may include the need to enhance confidence in the Philippine rural banking system, to encourage savings in regional rural banks, and to ensure efficient transfer of resources from savers to investors. Conclusion