The Banking System and its Operation

Abstract

This chapter examines the banking system and the related operations of credit control. It shows (i) that the banking system was designed as an integral part of the economic system and therefore had similar problem of incentive incompatibility, and (ii) that financial reform, whilst weakening central control, failed to change the fundamental design of the banking system. As a result of these characteristics, local governments gained a stronger influence over credit policy operations of local bank branches despite central government retention of control of the central bank and head offices of the specialised banks. The banking system effectively facilitated the interactive process of central and local investment. The chapter first examines the design of the banking system and the impact of financial reform. It then scrutinises in detail the banks’ operations in credit allocation, including the regional allocation of credit, its screening and monitoring.