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Bank based market Vs market based market

Introduction:
In countries such as Japan, France and Germany, where banks provide around 20% of the
corporate financing, it is known that banks are making significant effort to develop a
relationship banking culture, with long-term loans and preferential interest rates for clients
with a good history. These economies can be called Bank-Based Economies. This type of
finanacial system is called bank based financial system.
In bank-based systems (as in Germany and Japan) banks play a leading role in mobilizing
savings, allocating capital, overseeing the investment decisions of corporate managers, and
providing risk management vehicles

There are also countries where the borrowing-lending activities take place through organized
markets, such as London Stock Exchange, in the UK, or New York Stock Exchange in USA.
These are known as Market-Based Economies. This type of system is called market based
financial system In market-based systems (as in England and the United States) securities
markets share centre stage with banks in getting society's savings to firms, exerting corporate
control, and easing risk management. As countries grow richer, financial markets play a more
important role relative to banks.
Although banks are present in these countries, they are highly competitive, the relationship
with lenders and borrowers is purely limited to the transactions of granting loans or taking
deposits and loans are usually granted on short-term.

Articles:

Tittle : BANK-BASED AND MARKET-BASED FINANCIAL SYSTEMS: CROSS-


COUNTRY COMPARISONS

Author: Asli Demirguc-Kunt and Ross Levine,1996 june

Data analysis: A countrys financial system is considered underdeveloped if it has below


measure of financial structure will be larger in countries where banks are actively engaged in
The relative activity measure of financial structure yields a somewhat different classification
of countries than the relative size measure Structure measure of financial structure, Table 11
ranks countries along the spectrum from bank- Using an aggregate index of financial
structure we see that in higher income countries financial

Conclusion: looking at correlations and simple regressions that control for the level of real
GDP per capita. We see that countries with a Common Law tradition, strong protection for
shareholder rights, good accounting standards, low levels of corruption and no explicit
deposit insurance tend to be more market-based, even after controlling for income. On the
other hand, countries with a French Civil Law tradition, poor protection of shareholder and
creditor rights, poor contract enforcement, high levels of corruption, poor accounting
standards, heavily restricted banking systems, and high inflation tend to have underdeveloped
financial systems in general, even after controlling for income.
Tittle: Economic Performance in Bank-Based and Market-Based Financial Systems: Do
Non-Financial Institutions Matter?

Author: Mehmet Uzunkaya


Data analysis: this paper shows that non-financial institutions, specifically rule of law, do
matter for the relative merits of bank-based and market-based financial systems. Market-
based systems work better in low rule of law countries, while bank-based systems are more
efficient in high-rule of law countries. These results are consistent with the premise that
market-based systems superiority in solving the incomplete information problem dominates
over bank-based systems superiority in solving the moral hazard and contract enforcement
problems, which are expected to be more prevalent in low rule of law countries. Marketbased
systems function better in financially developed economies, while bankbased systems are
better in financially underdeveloped economies. The findings of this paper can explain the
co-existence of market-based and bank-based systems throughout the world across both
developed and underdeveloped economies. The findings also have policy implications for
developed and developing countries with regard to giving priority to improving their markets
or banking systems.

Conclusion: Market-based systems work better in low rule of law countries, while bank-
based systems are more efficient in high-rule of law countries. the level of financial
development also matters in the relative merits of market-based and bank-based financial
systems,the findings that financial development favors market-based systems and rule of law
favors bank-based systems can be a possible explanation regarding the fact that. The
coexistence of market-based and bank-based systems throughout the world across both
developed and underdeveloped economies can be a result of the competing effects of
financial development and rule of law on the functioning of financial institutions. The
findings also have policy implications for developed and developing countries with regard to
giving priority to improving their markets or banking systems. If market-based systems work
better in low-rule-of-law countries, which are generally underdeveloped or developing both
in terms of their economies and market systems, then such countries should give priority to
improving the functioning of market mechanisms. On the other hand, high-rule-of-law
countries, which are generally developed both in terms of their economies and market
systems, should aim at improving their banking systems.
Tittle:Bank-based Versus Market-based Financial System: Does Evidence Justify the
Dichotomy in the Context of Kenya?

Author: Jared Osoro and Evans Osano


Date: December 2014

Data analysis: This paper aims at analyzing the bank-based versus market-based
dichotomy of While the motive of such venture from a purely business strategic positioning is
the pursuit of revenue diversification, its implication on the overall development of the
capital markets is an issue that has received little analytical interest.

The fact that banks are being drawn towards capital markets related operations motivates this
papers objective of seeking to determine whether these developments are for the exclusive
benefit of banks or they engender further capital markets deepening for the benefit of the
economy.

Deploying a Vector Error Correction Model, we empirically establish a long-run relationship


between the evolution of the banking sector and capital market inKenya.

This is manifested by a co-integrating relationship between credit to private sector and


market capitalization, total equity turn over and Treasury bill rate.

We therefore infer that there is a coevolving relationship between the capital market and the
banking industry.

We thus reject the hypothesis that given the dominance of banks, the lure of capital markets
to banks is underpinned by the desire by banks to entrench their dominant market position.

Conclusion: Kenyas financial system is bank-dominated implying therefore that in the


conventional bank-based market-based .The very fact that there are incentives that draw
banks towards capital markets related operations motivates this papers objective of seeking
to determine whether these developments are for the exclusive benefit of banks or they
engender further capital markets deepening for the benefit of the economy.

There is a co-integrating relationship between credit to private sector and market


capitalization, total equity turn over and Treasury bill rate. We therefore infer that there is a
coevolving relationship between the capital market and the banking industry, even with the
clear signs of bank dominance in Kenyas financial system. We reject the hypothesis that
given the dominance of banks, the lure of capital markets to banks is underpinned by the
desire by banks to entrench their dominant market position. In essence, the keen interest and
participation of commercial banks in capital market activities is a reflection of the potential of
the former to promote the latters development and not a desire to entrench dominance at its
expense.

Consequently, we observe that while superficially the bank-based market based contrasting
may be justified by there being a dominant subsector in the financial system, the evidence of
co-evolution is a pointer to the questioning of the merits of such a strict dichotomy, at least in
the context of Kenya.
( Billion)
credit system in industries
Financia
Mar. l year so
20, 2014 2015 far Y-o-Y
2015 Oct. 31 Sep. 18 Oct. 30 2015-16 2015
Industry 1 2 3 4 5 6
1 Industry 26,576 25,348 26,293 26,506 0.3 4.6

1.1 Mining &


Quarrying (incl.
Coal) 360 372 339 346 3.6 6.8

1.2 Food
Processing 1,715 1,422 1,448 1,427 16.8 0.3

1.2.1 Sugar 414 334 352 358 13.6 7.2

1.2.2 Edible Oils &


Vanaspati 211 181 176 179 15.0 1.3
1.2.3 Tea 32 33 31 31 4.1 6.4

1.2.4 Others 1,058 874 890 859 18.8 1.7

1.3 Beverage &


Tobacco 186 188 176 176 5.6 6.5

1.4 Textiles 2,019 1,939 1,953 1,944 3.7 0.2

1.4.1 Cotton
Textiles 1,000 945 953 956 4.4 1.2

1.4.2 Jute Textiles 22 24 22 22 2.4 7.4

1.4.3 Man-Made
Textiles 204 197 207 205 0.6 4.2

1.4.4 Other Textiles 793 774 771 761 4.1 1.7

1.5 Leather &


Leather Products 102 101 101 102 0.2 0.7
1.6 Wood & Wood
Products 98 97 101 100 1.7 3.4

1.7 Paper & Paper


Products 341 332 345 346 1.5 4.3

1.8 Petroleum, Coal


Products & Nuclear
Fuels 561 561 416 450 19.8 19.7

1.9 Chemicals &


Chemical Products 1,545 1,484 1,550 1,533 0.8 3.3

1.9.1 Fertiliser 254 217 216 215 15.2 0.7

1.9.2 Drugs &


Pharmaceuticals 493 477 517 505 2.4 5.8

1.9.3 Petro
Chemicals 331 353 347 353 6.8 0.1

1.9.4 Others 467 437 470 459 1.7 5.1

1.10 Rubber,
Plastic & their
Products 378 372 371 357 5.6 4.2

1.11 Glass &


Glassware 88 89 85 85 3.5 4.2

1.12 Cement &


Cement Products 560 555 561 551 1.7 0.8

1.13 Basic Metal &


Metal Product 3,854 3,662 3,899 3,938 2.2 7.5

1.13.1 Iron & Steel 2,834 2,708 2,907 2,930 3.4 8.2
1.13.2 Other Metal
& Metal Product 1,020 954 992 1,008 1.1 5.7

1.14 All Engineering 1,540 1,478 1,549 1,538 0.1 4.1

1.14.1 Electronics 368 351 380 385 4.6 9.6

1.14.2 Others 1,172 1,126 1,169 1,153 1.6 2.4

1.15 Vehicles,
Vehicle Parts &
Transport
Equipment 682 654 685 677 0.7 3.6

1.16 Gems &


Jewellery 718 698 722 707 1.6 1.3

1.17 Construction 743 739 731 750 0.9 1.5

1.18 Infrastructure 9,245 8,874 9,473 9,609 3.9 8.3

1.18.1 Power 5,576 5,270 5,804 5,826 4.5 10.6

1.18.2
Telecommunication
s 919 901 897 924 0.6 2.6

1.18.3 Roads 1,687 1,643 1,715 1,760 4.3 7.2

1.18.4 Other
Infrastructure 1,064 1,060 1,057 1,098 3.2 3.6

1.19 Other
Industries 1,839 1,733 1,790 1,871 1.7 8

1192.12 1133.56 1183.79 1192.15 4.44444


mean 8 4 5 4 2.82 4
1722.95 1644.95 1771.78 1792.86 3.05857
standered deviation 5 3 6 3 1.773294 3
120000
100000
80000
60000 credit system in industries
2015 Oct. 30
40000
credit system in industries
20000
2015 Sep. 18
0

1.13 Basic Metal &


1.9.2 Drugs &

1.15 Vehicles, Vehicle


1.1 Mining & Quarrying

1.9 Chemicals &


1.5 Leather & Leather
1.7 Paper & Paper

1.13.2 Other Metal &


credit system in industries
1.2.3 Tea

1.14.1 Electronics

1.18.1 Power
1.18.3 Roads
1.2.1 Sugar

1.9.4 Others
1.11 Glass & Glassware

1.17 Construction

1.19 Other Industries


1.3 Beverage & Tobacco
1.4.1 Cotton Textiles
1.4.3 Man-Made Textiles

2014 Oct. 31
credit system in industries
Mar. 20, 2015

AS ON AS ON
PARTICULARS 31.05.2015 31.05.2014
REFINANCING LOAN
PRODUCTION & MARKETING CREDIT 887112142 79,80,61,500
LOANS FOR PRODUCTION CREDIT 0 0
OTHER INVESTMENT LOAN
MEDIUM & LONG TERM PROJECT LOANS 611726719 460838199
INTERIM FINANCE 0 0
DIRECT FINANCES TO DCCBS 28181668 20116111
DIRECT LOAN
LOANS UNDER RURAL INFRASTRUCTURE
DEVELOPMENT FUND 835452344 789570751
LOANS UNDER WAREHOUSE INFRASTRUCTURE FUNDS 11535018 4156461
LONG TERM LOANS UNDER NON PROJECTS 9992947 8011068
LOANS UNDER NIDA 22226312 17502707
LOANS TO OPRGANIZATION DEVELOPMENT 3548625 2592118
CREDIT FACILITY TO CFF 48274500 25946798
OTHER LOAN
COOPERATE DEVELOPMENT FUND PROGRAMME
LOAN 12857 17348
MICRO FINANCE DEVELOPMENT 128110 324023
WATER SHED DEVELOPMENT FUND 414501 380986
TRIBA;L DEVELOPMENT FUND PROGRAMME LOAN 151130 131731
KFWUPNRM LOAN 1272442 1419969
FARM INNOVATION PROMOTION FUND 0 2284
NFS ACTIVITY PROGRAMME 73616 95373
FARMER TECHNOLOGY FUND 2029 8873
FARMER SECTOR PROMOTION ACTIVITY 17039 0
COFINANCE LOAN 95008 226722
CP-HCC DEEMED ADVANCES 485918 516836
TOTAL 246090304 2130117048
MEAN 117686662.1 157362518.5
SD 274971378 194010302.6

Stock market:

YEAR AMOUNT(Rs. NO. OF


cr) ISSUES
1989-90 2,522 186
1990-91 1,450 140
1991-92 1,400 195
1992-93 5,651 526
1993-94 10,821 764
1994-95 12,928 1336
1995-96 8,723 1402
1996-97 4,372 684
1997-98 1,132 58
1998-99 504 22
1999-00 2,975 56
2000-01 2,380 110
2001-02 1,082 6
2002-03 1,039 6
2003-04 17,807 28
2004-05 21,432 29
2005-06 23,676 102
2006-07 24,993 85
2007-08 52,219 90
2008-09 2,034 21
2009-10 46,941 44
2010-11 46,182 57
2011-12 23,982 36
2012-13 34,313 44
2013-14 15,234 83
2014-15 29,716 39
2015-16 34,322 42
2016-17 (as 12,939 20
on 31/08/16)

MEAN 16,399 168


STNADERD
DEVIATION 15729.63033 378.0632
AMOUNT(Rs. cr)
60,000
50,000
40,000
30,000
20,000
10,000 AMOUNT(Rs. cr)
0

2016-17 (as on
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
NO. OF ISSUES
1600
1400
1200
1000
800
600 NO. OF ISSUES
400
200
0
1999-00
1989-90
1991-92
1993-94
1995-96
1997-98

2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
2013-14
2015-16

Conclusion
Market based marketing and bank based marketing are equally importance and have their
own roles in their financial system. There cannot be made compression, which system is
beneficial. THE coexistence of both bank based and market based financial system generates
a competitive market .both the markets acts as a source of fund. As India is developing
country ,rules and regulation are large strict, India has the major transactions and circulation
of money through banks. In each and every sector banks has its own role, only less than 5%of
money transaction takes place through stock exchanges. Banks are major source of finance to
Indian market, and it contribute to increase the GDP of Indian economy. So India is a bank
based market. Countries like USA AND UK stock market is the major source of finance

Bibliography: https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=15964

http://dx.doi.org/10.1108/01435129110137237
www.emeraldgrouppublishing.com/licensing/reprints.htm
by S.G.SAI SARATH
15BBA0036