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Bank privatisation is an instrumental element in the structural improvement programs in both developed as well as developing countries (Nabli, 2010). The objective of these strategies is to attain the advanced micro efficiency as well as foster economic development. Bank privatisation has several advantages, for instance, economic efficiency, lower state interference, improved performance and sustainability. Just like a double edged sword, bank privatisation has several disadvantages, for instance, the cost of making weak banks appear attractive to private investors may exceed the revenues from privatisation. Even though bank privatization has several disadvantages; its advantages far much outweigh the disadvantages.
Private banks have low chances of being exposed to solvency compared to state owned banks. This is because the proceedings of state-owned bank institutions are lower compared to what they ought to be (Malone & Gray, 2008). This reduces availability of earnings which ought to be a defense against unanticipated losses as well as reducing the capability to produce the capital through the retained profits (Taylor & Schooner, 2009). The macroeconomic environment in any state is the same for state-owned and private banks. Therefore, observable differences between state-owned and private owned banks ought to be attributed to bank-specific factors. A range of issues could be contributing to poor performance of government-owned banks, including main objectives other than less competent management, profit maximization, operational inefficiencies, as well as poorly developed risk management (Chuang, 2011). Furthermore, government-owned banks may be less rigorously supervised, consequently leading to lower chances of detecting emerging issues as well as implementation of remedial strategies by the supervising authority.
Bank privatisation is essential since it helps to promote economic efficiency, as well as lower state interference in the economy (Chang, 2006). Bank privatisation is successful in meeting development objectives. Policymakersexpect bank privatisation to be more effective in meeting consumer demands(World Bank, 2007). Efficiency gains can do away with the requirement for subsidies, free up fiscal assets for other priority spending or debt reduction. The likely fiscal burden of subsidizing credit, as well as operating costs in incompetent state-owned banks can instigate political enthusiasm for privatisation. A more competent banking system benefits the overall economy by reducing intermediation costs. Even without adjusting the market structure bank privatisation improves efficiency, if it deters interventions by politician’s intent on utilizing state owned enterprises for their personal or political goals. Politicians can also influence private organizations to subsidize its constituents.
Privatisation leads to improved bank performance. For instance, Brazil divested some banks as well as retained control of others which it aimed to restructure. There was advanced performance in Brazil’s privatized banks. However, there was no change in state restructured banks (Venardos, 2008). This encouraged bank privatisation and to date most banks in Brazil have been privatized since it leads to improved performance. On the other hand, Nigeria did not put much control to privately owned banks (Chaos, 2007). There was an improvement in portfolios quality as well as profitability in Nigerian banks which the government divested its shareholdings, however where the state retained minority shareholdings performance was worse compared to fully privatized banks.
The expenditure of implementing bank privatisation may far much exceed the returns from privatization. This is not a rare situation and even when long-term cost savings are considerable, the instant financial burden of making feeble banks attractive to investors can be far much greater than the instantaneous costs of continued state-ownership (Venugopal, 2007). This is evident if recognition of the expenditure of government-owned banks is deferred in the course of supervisory forbearance. Over and over again, banks may appear sound as well as profitable, if the loan loss provisioning needs as well as capital the adequacy needs are not implemented (Jeffries, 2006). This establishes a strong incentive for the “wait and hope” strategy. Unfortunately, the condition of weak banks is likely to worsen, unless the significant actions are taken.
In a nutshell, bank privatization is essential since it helps in several issues such as economic efficiency, improved performance, lower state interference and sustainability. All these are essential in economic growth of any state; however, there are several disadvantages which are associated with bank privatization. For instance, the expenditure of making feeble state-owned banks attractive to private investors may far much exceed the returns from privatization. This therefore implies that states will continue owning banks since the cost of privatization will be high as well as unsustainable.