Rural Banks, Resource Allocation Efficiency and Regional Economic Performance

Abstract

Using panel data for the period 1993 to 2005 from 16 regions of the Philippines, this study investigates whether the resource allocation efficiency of Philippine rural banks resulting from the quantity and quality of banking intermediation activities affects regional economic growth. To explore this relationship, four measures of resource allocation efficiency were alternatively tested employing pooled generalized least squares (EGLS) estimation. The findings suggest that Philippine rural banks need to make allocative adjustments in the areas of branch presence, operational efficiency and credit participation. These results lend support to government efforts to strengthen the rural banking sector and to increase the volume of investments in the regions. Important policy implications of these findings 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.