TOWARDS A GRADUAL APPROACH TO LIBERALIZE INTEREST RATE: HOW THIS PROCESS IS BENEFICIAL ON CREDIT ALLOCATION AND INVESTMENT?

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1 European Journal of Research and Reflecon n Managemen Scences Vol. 4 No. 2, 206 TOWARDS A GRADUAL APPROACH TO LIBERALIZE INTEREST RATE: HOW THIS PROCESS IS BENEFICIAL ON CREDIT ALLOCATION AND INVESTMENT? Benhabb Abderrezak & Moséfaou Sofane & Prof. Yousfa Al Unversy of Adrar, ALGERIA ABSTRACT One of he many ndcaors ha conduc he nvesmen decson s he neres rae. The laer has been generally defned va dfferen channels of concepon. The fnancal concepon saes ha neres rae s he me value of money or he reward o pu asde your money n aemp o ge revenue n he fuure. The economc concepon means ha he neres rae s a proxy showng how well he cred allocaon mechansm and he moblzaon of fnancal resources are. In hs conex wo mechansms are adoped: he economc mechansm and he offcal one. The former consders he movemens of he neres raes as conducve o he varous nvesmen decsons (ndependen varable) whle he second vew regards he neres rae as dependan varable followng he nvesmen behavor (dependan varable). Ths paper sheds lgh on he venues hrough whch he dfference beween he depos and lendng neres raes mpac he nvesmen decson va cred allocaon mechansm. Keywords: Ineres rae, depos rae, lendng rae, nvesmen. INTRODUCTION The phlosophy of cred allocaon refers o he meanng of raonaly and choce earler lad down by phlosophers of polcal economy. In hs sense, cred s an economc em exploed n an aemp o sasfy a wan. Therefore, he raonaly mples he good drecon of hs mean owards s bes uses. The economc heory suggess ha ndvduals need o maxmze he benefs from he usage of her creds, he fac ha enhances hese agens o expand her economc acves by a recurren ncenve (he psychologcal ncenve of dong busness). Invesmen s one of he mporan deermnans of growh and prospery. I generaes value added, echnology and realzes he socal welfare by decreasng he unemploymen rae and achevng he socal harmony. The concepon resdes n mappng he ways on whch he economy aans he hgh levels of nvesmen boh n erms of qualy (allocaon paradgm) and quany (effcency paradgm). In hs conex, neres rae plays a major role n deermnng he magnude of he nvesmen decson because s he capal drver of he fnancal resource needed o engage n busness acves. Heren here s a conroversy abou managng he neres rae n such a way ha ncreases a maxmum he benefs of s manpulaon sraegy. The ssue s o deermne he behavor waned of he neres rae wheher o lberalze or o fx. The purpose of all hs s o fnd ou he opmal neres rae ha drecs he fnancal resources owards her bes allocaon whch mplcly mean a hgh degree of nvesmen benefs. Ineres rae and nvesmen: ways of ransmsson The relaonshp beween nvesmen and nvesmen s a ferle groundwork for research and nvesgaon boh a mcro or macro levels. Macroeconomcs consders ha he nvesmen volume decreases wh he ncrease of he neres rae. The reason behnd hs s ha he neres rae s a cos of borrowed funds necessary for dong nvesmens and as he coss Progressve Academc Publshng, UK Page 6

2 European Journal of Research and Reflecon n Managemen Scences Vol. 4 No. 2, 206 ncrease, he ncenve of ndvduals o make busness decreases auomacally (psychologcal analyss of he nvesmen behavor). Ths vew conradcs wh he nsuonal consderaon of he neres rae. The laer means ha he economc agens responsble for lendng (fnancal nsuons) fnd advanageous for hem when he neres rae ncreases because s he reward of he funds provded (nsuonal analyss of he nvesmen behavor). The marke law s applcable n whch he ndvdual and nsuon ncenves are he major forces. Therefore, he neres rae does no conduc he nvesmen acvy per se bu nfluences he behavor and changes he ncenves of he nvesmen agens. In hs conex, he behavor of he neres rae has an mpac on he ndvduals' audes wheher hs behavor refers o he level of he neres rae (mpac of he varable exen) or s compormen (lberalzed versus fxed rend). Ineres rae levels and cred allocaon Ths pon sresses on he levels of he neres rae ha realze a good allocaon of he fnancal resources. For hs reason, wo raes are dsngushed: depos rae and lendng rae. The former means he reward go by he saver when he keeps hs funds n a fnancal nsuonal. The relaonshp beween he saver reward and he money pu asde n he fnancal nsuon s presumed o be posve. The harder he ncenve o save money and he bgger he money volume as well as he savng perod, he bgger he reward wll be n one hand. In anoher hand, he reward s a cos ncurred by he fnancal nsuon. Hence, he laer res o manage effcenly he coss pad n a way ha enables hs nsuon saves more and lends more (srenghenng he organzaonal sraegy of he fnancal frm). To hs purpose, he nsuon keeps he spread beween he depos and lendng raes organzed n favor of he organzaon aspraon boh n shor and long erms. The mplcaon from hs s o specfy he level of he neres rae spread ha keeps he neracon beween he nsuon and s clens (deposors and lenders) posve. Consder he followng random uly model: C j, N j, () E 0, ( U j, ) V ( N j, ( )) d / ( U j, ) V ( N j, ( )) 0 n j In whch: E 0, s he level of he uly from he nal perod o he me pon, s he dscoun facor of he uly model (measures he coeffcen of he uly funcon a he nal perod), ( U j, ) s he uly deermnsc funcon (combnes he uly ndcaors), n j s he populaon sze accordng o s dfferen agens, V ( N j, ( )) s he depos and lendng behavor based on he movemen of he neres rae ( ). The economc agen (borrower or lender) res o maxmze hs benef hrough hs raonal behavor n dealng wh he prvae ndcaors of he uly funcon (endogenous facors) and he exogenous deermnans of he uly funcon revealed here by he correlaon beween depos, lendng and he neres rae behavor. Thus, he objecve of he economc agen s: C j, ( U j, ) max / C j, 0 N j, () V ( N j, ( )) max / 0 () 0 (2) Progressve Academc Publshng, UK Page 7

3 European Journal of Research and Reflecon n Managemen Scences Vol. 4 No. 2, 206 () j, j, 0 ( U ) C d / s a parameer of drecon ( drecs he uly funcon owards opmal level by respecng he mpac of he exogenous). Thus: lm (As far as approaches he number, he capacy of he parameer o absorb he exernal shocks affecng he funcon wll be srong). (2) V ( N j, ( )) N j, ( ) d 0 / s a parameer ha absorbs he negave mpac of he shocks on he exernal uly funcon. In ha case: 0 (The absorpon capacy s srong as akes bg values) As he exernal uly funcon comprses he lendng and he depos behavor, he objecve of he agen s o maxmze he exernal uly. Thus: E V ( N ( )) max V ( N ( )), V ( N ( )) (3) 0, j, j, j, The cred allocaon akes he followng form: C, E, ( I, ) / C, s he cred allocaon, I, s he nvesmen funcon (4) And as he nvesmen behaves accordng o he varaons of he neres rae, he cred allocaon wll be accompaned by boh lendng and depos behavors: C, E, V ( N j, ( )) V ( N j, ( )) (5) The objecve of he fnancal agen s o allocae creds effcenly accordng o he behavor of he neres rae: C, e ( I ( )) ( I ( )) (6) Therefore, he neres rae lberalzaon has objecves wdenng gradually he gap beween he neres rae as cos ( I ( )) and he neres rae as a reward ( I ( )).Ths fac srenghens he capacy of he fnancal nsuon o manage effcenly he creds and reduce he rsks of defauls: Ef, C, R / R, P( C, ) s he rsk of defaul and bankrupcy, occurs when he parameer of depos and lendng equals (he pon on whch he bank s no able o lend and he deposors do no wan o pu her funds n he fnancal nsuon). Graphcally can be shown by he followng curves: U The opmal pon ( ) C / R he warnng pon j, Managemen Bankrupcy and Bankrupcy level The opmal level of cred Towards effcency defaul allocaon Fgure.. Ineres rae and cred allocaon Source: he researchers Progressve Academc Publshng, UK Page 8

4 European Journal of Research and Reflecon n Managemen Scences Vol. 4 No. 2, 206 Ineres rae and nsuonal effcency The nsuonal effcency s a erm used o denoe he capacy of he nsuon o manage boh he curren and fuure evens. I s by hs meanng referrng o any sraegy ha ams o ncrease he probables of successes and reduce hose of falures. In hs conex, he economc heory suggess for he organzaons o conceve a road map as a sraegy o srenghen he explove capacy of he opporunes and o overcome he weakness burden comng from he dfferen consrans ha face he organzaon. The neres rae s one of he ndcaors ha nfluence he behavor of he organzaon boh n erms of operaon and qualy. For nsance, he movemen of he neres rae has a dmenson on he way of how he enerprse akes decsons abou he nvesmen nenons (psychologcal effec of he economc ndcaor). Moreover, he neres rae manpulaes he operaon processes aken by he organzaon concernng he nenon o expand or conrac. Thus, he organzaon should know he effec of he neres rae movemen on s capacy o develop s operaon poson of he operaon (operaonal effec) or on he sraegy of he organzaon (sraegy effec). Despe he fac ha neres rae mpacs negavely he nenon of he organzaon when ges bgger, hs does no mean ha he ndcaor per se s a damper o acheve he long erm nenons. Therefore, remans o conceve a correlaon beween he negave mpacs and he posve ones on he manageral effcency of he nsuon (he manageral meanng of he neres rae). Consder he nsuon effcency model: Ef 0, (, j ) P ( D, j ( )) d 0 / (, j) s he organzaon operaon funcon, s 0 he coeffcen of operaons, P ( D, j( )) s he funcon of he organzaon resources, s he neres rae, denoes he goals of he organzaon (shor and long erms). The objecve of he nsuon s o maxmze s effcency behavor accordng o he movemen of he neres rae. Ths process means ha ends o reach he followng pon: ( Ef 0, ) Ef (The opmal effcency) (7) ( ) ( ( )) Ef, j P D, j (8) Hence, he opmal cred len by he fnancal nsuon s represened by he followng model: Ef C R (9),, e ( I ( )) e ( I ( ) (9) Ef, (0) The neres rae lberalzaon has an effec on drecng boh he operaon and specfcy of he nsuon owards he opmal pon of cred allocaon and he approprae allocaon. The opmal value of he neres rae s he value ha resolves he equaon: e ( I ( )) e ( I ( ) (, j ) P ( D, j ( )) () The frs sde of he equaon represens he goals of he organzaon whle he second sde denoes he organzaon per se. The neres rae whch realzes he equaon s ha whch Progressve Academc Publshng, UK Page 9

5 European Journal of Research and Reflecon n Managemen Scences Vol. 4 No. 2, 206 allows he organzaon managng effcenly s resources n presence of he varous consrans: fnancal, legal, echncal and nformaonal. The opmal neres rae s represened by he followng curves: Lendng /borrowng equlbrum neres rae Effcency Opmal effcency (Hghes level of leverage) Measure of effcency (Poolng and lendng capacy) Fgure. 2. Ineres rae movemen and he organzaon effcency Source: he researchers The fgure above shows ha he lberalzed movemens of he neres rae ncrease he organzaon effcency because he neres rae oblges he organzaon o adap o he dfferen crcumsances and predc he poenal clens (borrowers and lenders). Ths ssue creaes a flexble and connual capacy of he frm o manage he dscrepances occurrng whn he conex of he neres rae (mpac of neres rae sochasc behavor on he organzaon) or a he level of he resuls emanang from hese movemen (exernales of he neres rae movemens). Ineres rae lberalzaon and neres rae spread The neres rae spread s erm coned o denoe he dfference beween he lendng and depos neres rae. Moreover, hs erm also descrbes he varaon beween he shor erm and long erm reasury raes as a predcor of he fnancal sysem soundness and effcency. I s by hs sense shows how well he banks and he fnancal sysem n general s effcen o channel funds from deposors o lenders, poolng funds and managng he asymmeres occurrng beween he pars of he ransacon. A hgh level of he neres rae spread means a msmach n he poolng acves of he bank or a defcency of he nformaon sysem used by he fnancal nsuon or boh of hem. The ssue here s o reveal he mporance of lberalzng he neres rae n dmnshng he hgh levels of he spread whch mean mplcly one of he onses of he bankrupcy sympoms (hgh operang coss, cred spread, hgh levels of moral hazard and adverse selecon). In hs conex, he lberalzaon of he neres rae allows banks o adjus he dfference beween he lendng and depos raes o marke based value. Ths means mplcly ha he spread whn he marke conex s conduced by he marke behavor (boom or bus cycles). The flexbly emanang from he marke power les he spread flucuang whn a band surrounded by lms of marke condons (he spread snake) as s shown by he followng fgure: Progressve Academc Publshng, UK Page 20

6 European Journal of Research and Reflecon n Managemen Scences Vol. 4 No. 2, 206 Marke plaform of balance Lendng rae Level of spread Depos rae Year Fgure. 3. The spread band Source: he researchers The fgure above reveals he exen of he flucuaon of boh depos and lendng accordng o he equlbrum level offered by he marke condons. Consder he marke level M, lendng rae L, depos rae D. The behavor of he neres rae accordng o he marke behavor follows he followng equaon: ( L ( ) M ) d ( D ( ) M ) d L D 0 0 (2) L () Lendng behavor, D () depos behavor, : he me frame The objecve of he fnancal nsuon s o reach he pon a whch he nsuon ges he hghes level of cred allocaon n respec of he marke movemens. I follows ha: ( L( ) M ) ( D ( ) M ) Ef 0, (3) The las equaon means ha he arge fulflls he effcency of he lendng and he depos behavors by respecng he marke condons as s llusraed by he followng fgure: Effcency level of effcency Pon of he hghes level of cred allocaon Curve of depos behavor Curve of lendng behavor Lendng /depos behavor Fgure. 4. The hghes pon of cred allocaon Source: he researchers CONCLUSION The paper shows he relaonshps beween he movemen of he neres rae and he movemen of he markes. In hs conex, he managemen of neres rae s a srong ndcaor of he performance and he effcency of he nsuon. By presenng he dfferen models ha explan he behavor of he neres rae n erms of effcency, hree mporan nsghs emerge: - The nsuon should ake no consderaon he marke suaons when conceves he sraeges of dealng wh deposs and creds. - The lberalzed behavor of he neres rae s benefcal for he frm o confne he lms of neres rae flucuaon n favor of he fnancal and economc arges of he nsuon. Progressve Academc Publshng, UK Page 2

7 European Journal of Research and Reflecon n Managemen Scences Vol. 4 No. 2, The hghes level of cred allocaon depends on he realzaon of boh he effcences: he lendng effcency and he depos one. The research on he neres rae lberalzaon on he effcency of he fnancal nsuon and he cred allocaon s a ferle groundwork whch necesses and paves he way for furher research boh a heorecal and emprcal levels. REFERENCES Ahmad Zubad Baharumshah, Sew-Voon Soon, Nor Ashah Hamzah. (203), Pary Reverson n Real Ineres Rae n he Asan Counres: Furher Evdence Based on Local-Perssen Model, Economc Modelng 35, Albero Marn, Jaume Venura. (205), The Inernaonal Transmsson of he Cred Bubbles: heory and polcy, Journal of Moneary Economcs, -43 Barry Echengreen, Racha Gullapall, Ugo Panzza. (20), Capal Accoun Lberalzaon, Fnancal Developmen and Indusry Growh: A Synhec Vew, Journal of Inernaonal Money and Fnance 30, Bran Burgoon, Pancos Demerades, Geoffrey R. D. Underhll. (202), Sources and legmacy of fnancal lberalzaon, European Journal of Polcal Economy 28, 47-6 Chaporn Vhessonh, Jma Tongura. (202), The Impac of Capal Accoun Lberalzaon Measures, In. Fn. Markes, Ins. And Money 22, 6-34 Chh-Te Yang, Chung-Yuan Dye, J-Feng Dng. (205), Opmal Dynamc Trade Cred and Preservaon Technology Allocaon for a Deerorang Invenory Model, Compuers and Indusral Engneerng 87, Geroge Bulkely, Rchard D.F. Harrs, Vvekanand Nawosah. (205), Can Behavoral Bases Explan he Rejecon of he Expecaon Hypohess of he Term Srucure of Ineres Raes, Journal of Bankng and Fnance 58, Hans Degryse, Olena Havrylchyk, Emla Jurzyk, Sylweser Kozak. (202), Foregn Bank Enry, Cred Allocaon and Lendng Raes n Emergng Markes: Emprcal Evdence from Poland, Journal of Bankng and Fnance 36, Jar Hannkanen. (205), Zero Lower Bound, Unconvenonal Moneary Polcy Indcaor Properes of Ineres Rae Spreads 96, Revew of Fnancal Economcs 26, Joseph P. Byrne, Gorgo Fazo, Norber Fess. (202), Ineres Rae Co-movemens, Global Facors and he Long End of he Term Spread, Journal of Bankng and Fnance 36, J. Sco Davs, Adrenne Mack, Wesley Phoa, Anne Vandenabeele. (205), Cred Booms, Bankng Crses, and he Curren Accoun, Journal of Inernaonal Money and Fnance, -8 Leonardo Lacovone. (202), The beer you are sronger makes you: Evdence on he asymmerc mpac of lberalzaon, Journal of Developmen Economcs 99, Le-Jane Kao. (205), A Porfolo-Invaran Capal Allocaon Scheme Penalzng Concenraon Rsk, Economc Modelng 5, Luca Esposo, Andrea Nobl, Tzano Ropele. (205), The Managemen of Ineres Rae Rsk durng he Crss: Evdence from Ialan Banks, Journal of Bakng and Fnance 59, Ludger Lnnemann, Andreas Schaber. (205), Lqudy Prema and Ineres Rae Pary, Journal of Inernaonal Economcs 97, Progressve Academc Publshng, UK Page 22

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