University Knowledge Digital Repository - UPLB

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University of the Philippines Los Baños University of the Philippines Los Baños

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Graduate Student's Output Theses and Dissertations

10-2000

The effects of interest rate liberalization on the supply of and The effects of interest rate liberalization on the supply of and demand for agricultural credit in the Philippines

demand for agricultural credit in the Philippines

Irene B. Binohlan

University of the Philippines Los Baños

Follow this and additional works at: https://www.ukdr.uplb.edu.ph/etd-grad Part of the Agriculture Commons

Recommended Citation Recommended Citation

Binohlan, Irene B., "The effects of interest rate liberalization on the supply of and demand for agricultural credit in the Philippines" (2000). Graduate Student's Output. 703.

https://www.ukdr.uplb.edu.ph/etd-grad/703

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IRENE B. BINOHLAN

THE EFFECTS OF INTEREST RATE LIBERALIZATION ON THE SUPPLY OF DEMAND FOR AGRICULTURAL CREDIT IN THE PHILIPPINES

SUBMITTED TO THE FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF THE PHILIPPINES AT LOS BANOS

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

DEGREE OF

MASTER OF SCIENCE (Agricultural Economics)

October 2000

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13- 6VIA-1-A DO B. CARADA The thesis hereto attached entitled, "THE EFFECTS OF INTEREST RATE LIBERALIZATION ON THE SUPPLY OF AND DEMAND FOR AGRICULTURAL CREDIT IN THE PHILIPPINES", prepared and submitted by IRENE B. BINOHLAN, in partial fulfillment of the requirements for the degree of Master of Science (Agricultural Economics) is hereby accepted.

6

ISABELITA M. PABU ON WIL

Member, Guidance Committee

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Date Signed

Member, Guidance Committee ep 2-111.1

Date Signed

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--e---- COKA(LON T. ARAGON Chair, Guidance Committee

✓- 6( ?--z—Lro Date Signed

Accepted as partial fulfillment of the requirements for the degree of Master of Science (Agricultural Economics).

/1440.44,

ceir EUE20 P. MARIANO

Chair

Department of Agricultural Economics

67 "Joy fkve.

Date Signed

• "72

RITA P. LAUDE Dean, Graduate School

University of the Philippines Los Bafios IVelt

Date Signed

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TABLE OF CONTENTS

CHAPTER PAGE

I. INTRODUCTION

Background and Statement of the Problem 1

Significance of the Study 5

Objectives of the Study 7

II. REVIEW OF LITERATURE

Empirical Studies that Support Financial Liberalization 8 Empirical Studies that Do Not Support Financial Liberalization 16 Empirical Studies on the Cost and Returns of Agricultural Lending 21 Under a Regulated and a Liberalized Financial Policy

III. THEORETICAL/CONCEPTUAL FRAMEWORK AND HYPOTHESES OF THE STUDY

Theoretical Framework 29

Conceptual Framework 34

Hypotheses of the Study 37

IV. METHODOLOGY

Types of Data and Methods of Data Collection 38

Analytical Procedure 39

Limitations of the Study 43

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PAGE

V. RESULTS AND DISCUSSION

Monetary and Credit Policies during the Pre-liberalization and

Liberalization Period 45

Average Agricultural Loan Portfolio 52

Ratio of Agricultural Loans Granted by Formal Financial 58 Institutions

Average Interest Rate 59

Average Rediscount and Required Reserve 61

Average Volume of Unsubsidized Loans Granted to the

Agriculture Sector and Sub-sectors 62

The Effects of Interest Rate Liberalization Policy on the

Agricultural Credit supply 64

The Effects of Interest Rate Liberalization Policy on the Demand for Agricultural Credit

Agriculture Sector 69

Food Crops Sub-sector 71

Export and Commercial Crops Sub-sector 73

Livestock and Poultry Sub-sector 75

Fishery Sub-sector 78

Forestry Sub-sector 80

Perception of Bankers on the Effects of Financial Liberalization In the Philippines

Sectors that Benefited from the Financial Liberalization 82

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PAGE

Effects of Financial Liberalization on the Lending

Operation of Banks 86

Effects of Financial Liberalization on the Deposit

Generation of Banks 88

Problems Encountered in Adopting the Liberalized

Interest Rates 89

VI. SUMMARY , CONCLUSION, AND RECOMMENDATIONS

Summary and Conclusion 92

Recommendations 100

LITERATURE CITED 103

APPENDICES 105

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LIST OF TABLES

TABLE PAGE

1 Average annual volume of potential agricultural loan portfolio, interest rates, rediscount rate, and required reserve during the

pre-liberalization and liberalization periods, Philippines,1973-1996. 53 2 Average annual volume of deposits, capital accounts, fixed assets,

number of financial institutions, and inflation rate during the

pre-liberalization and liberalization periods, Philippines, 1973-1996. 54 3 Average annual volume of unsubsidized loans granted to the agriculture

sector, average volume of loans granted to the sub-sectors, and the average nominal lending rate during the pre-liberalization and

liberalization periods, Philippines, 1977-1993. 56 4 Average annual growth rate and percent contribution Gross National

product of the agriculture, industry, and service sectors during the pre-

liberalization and the liberalization period, Philippines, 1973-1996. 57 5 Regression results showing the effects of interest rate liberalization

policy, rediscount rate, and reserve requirement on the potential

agricultural loan portfolio of banks in the Philippines,1973-1996. 65 6 Regression results showing the effects of interest rate liberalization

on the demand for loans by the agriculture sector, Philippines,

1977-1993. 70

7 Regression results showing the effects of interest rate liberalization on the demand for loans by the food crops sub-sector, Philippines,

1977-1993. 72

8 Regression results showing the effects of interest rate liberalization on the demand for loan by the export and commercial crops sub-sector,

Philippines, 1977-1993. 74

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TABLE PAGE

9 Regression results showing the effects of interest rate liberalization policy, nominal lending rate, and volume of livestock and poultry production on the demand for loans by the livestock and poultry sub-sector,

10 Regression results showing the effects of the interest rate liberalization policy, nominal lending rate, volume of production of fishery products, and volume of exports of fishery products on the demand for loans by

the fishery sub-sector, Philippines, 1977-1993. 79

11 Regression results showing the effects of the interest rate liberalization policy, nominal lending rate, and volume of production of forestry products on the demand for loans by the forestry sub-sector, Philippines, 1977-1993. 81 12 Response of 13 sample bankers with regard to the sector that benefited

most from the interest rate liberalization. 84

13 Response of 13 sample bankers with regard to the benefits from the

interest rate liberalization policy deposit generation. 85 14 Response of 13 sample bankers on the effects of interest rate

liberalization on lending operation. 87

15 Response of 13 sample bankers on the effects of interest rate

liberalization on deposit generation. 90

16 Response of 13 sample bankers on the problems encountered during

the interest rate liberalization period. 91

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LIST OF FIGURES

FIGURE PAGE

1 Graph showing the movements of the supply of and demand for agricultural credit during the liberalization

period. 33

2 Diagram showing the factors that affect the volume of

agricultural credit supply and demand. 36

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LIST OF APPENDIX TABLES

APPENDIX TABLE PAGE

1 Classification of commercial banks based on total assets,

Philippines, as of December 24, 1998. 105

2 Potential agricultural loan portfolio of banks (million pesos),

3 Ratio of agricultural loans granted, by institution, Philippines,

1977-1993. 107

4 Total liabilities and net worth of formal financial institutions,

5 Investment in bonds and securities by commercial and rural

banks (million pesos), Philippines, 1973-1996. 109 6 Average exchange rates in pesos per US dollar and balance

of payments, Philippines, 1976-1996. 110

7 Foreign interest rates (percent per annum), Philippines,

1976-1996. 111

8 Inflation rate on all items, Philippines, 1973-1997. 112 9 Number of firms registered with the Securities and Exchange

Commission, Philippines, 1977-1996. 113

10 Average land area and volume of agricultural production and exports,

11 Correlation matrix of variables used in determining

multicollinearity of variables. 115

12 Annual growth rate of required reserve and rediscount rate,

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APPENDIX TABLE PAGE

13 Total volume of exports (metric tons), Philippines, 1977-1996. 117 14 Interest rate, rediscount rate, and required reserve (percent),

15 Volume of agricultural loans granted, by institution

(million pesos), Philippines, 1977-1993. 119

16 Volume of agricultural loans granted, by sub-sector (million pesos),

17 Total agricultural production, Philippines, 1977-1993. 121 18 Total deposit liabilities of banks (million pesos), Philippines,

1977-1993. 122

19 Total borrowings and other liabilities of banks (million pesos),

20 Total capital accounts of banks and gross loanable funds,

(million pesos), Philippines, 1973-1996. 124

21 Total fixed and other assets of banks (million pesos), Philippines,

1973-1996. 125

22 Number of financial institutions, Philippines, 1976-1997. 126 23 Volume of unsubsidized and subsidized agricultural loans granted

(million pesos), Philippines,1977-1993. 127

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ABSTRACT

BINOHLAN, IRENE. University of the Philippines at Los Banos, October 2000. The Effects of Interest Rate Liberalization on the Supply of and Demand for Agricultural Credit in the Philippines.

Major Adviser: Dr. Corazon T. Aragon

The study sought to analyze the effects of the interest rate liberalization policy, and the other monetary policies , e.g., nominal lending rate, rediscount rate, and required reserve on the agricultural credit supply in the Philippines. On the demand side, it aimed to analyze the effects of the interest rate liberalization policy and the other factors such as the nominal lending rate and volume of production and exports on the demand for loans by the agriculture sector and its sub-sectors. The study used time series secondary data and primary data and employed two analytical procedures, namely: test of means and regression analysis.

The results of the study showed that the average agricultural loan portfolio of banks increased and was statistically significant when the interest rate liberalization policy was in place. However, the average ratio of the agricultural loans granted to total loans granted by the commercial and rural banks declined during the interest rate liberalization period. On the other hand, the regression coefficient showed an inverse and significant relationship between the agricultural credit supply and the required reserve.

Conversely, the rediscount rate did not have a significant influence on the volume of agricultural credit supply and had an illogical sign. On the demand side of agricultural

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credit, the results of the study showed a weak inverse relationship between the interest rate liberalization policy and the volume of loans availed of by the agriculture sector as a whole, being statistically non-significant at ten percent probability level. However, the sub-sectors indicated varied response to the interest rate liberalization policy. Among the sub-sectors that had a significant increase in the average volume of demand for credit during the interest rate liberalization policy were the food crops, livestock and poultry, and fishery sub-sectors. On the other hand, the export and commercial crops and forestry sub-sectors experienced a significant decline in the average demand for credit during the interest rate liberalization period. This shows an illogical relationship with the interest rate policy dummy. However, the decrease might be explained by the significant drop in the average volume of exports for both sub-sectors.

The perception of bankers on the effects of interest rate liberalization policy suggested a positive view on the liberalization policy, especially the commercial banks.

However, the rural banks disclosed that the liberalization policy posed adverse effects on banks that were not ready to install innovations so as to effectively withstand the stiff competition brought by the market-determined interest rate.

With these findings, the following are the recommendations: 1) increase government appropriation for rural infrastructures; 2) support the creation of an apex organization of rural banks for fund mobilization, research, and review of financial policies that affect them; and 3) the Central Bank to provide incentives to rural banks through more favorable rediscounting scheme.

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