Finance / The Financial System
The most significant financial institutions in the Thai money market are the commercial banks, followed by finance and securities companies. These two groups of institutions mobilized deposits accounting for some 76% of the country’s aggregate savings, and extended credits amounting to over 80% of total credit extensions during 1980 to 1989.
There are a total of around 30 banks operating in Thailand of which about half are locally incorporated and half branches of foreign banks. In addition there are around 30 representative offices of foreign banks.
The biggest Thai bank is the Bangkok Bank with almost 30% of the market. In 1991, the family that largely owns it has made it into the Forbes list of Dollar billionaires. The Krung Thai Bank and the Thai Farmers Bank are the next largest, each with around 15% of the market.
The total assets of commercial banks stood at 1,258 billion Baht as of June 1989. The growth of total commercial banks’ assets has averaged about 20% per annum since 1981 (with the exception of 1985 and 1986 when the growth was less than 10%).
The share of foreign banks’ deposits is only 2% of the total. This is partly due to the constraints imposed by the Bank of Thailand, particularly in terms of network expansion.
The commercial banks provide services which mainly involve the mobilization of savings in the form of deposits and the provision of loans. In recent years they have been competing fiercely to enlarge their market shares by improving the quality of facilities through computers, providing electronic banking services and increasing the range of banking services that are offered.
There are more than 100 finance and securities companies (with total assets as of December 1988 of 200 billion Baht) and 25 credit companies that provide short term loans at a rate about 2% higher than those of commercial banks. Lastly, there exist four state owned specialized financial institutions: the Bank for Agriculture and Agricultural Cooperatives; the Government Savings Bank; the Government Housing Bank; and the Industrial Finance Corporation of Thailand (IFCT).
In spite of the rapid expansion of the Thai financial system in the last two decades, it still has difficulty in providing adequate volumes of medium to long term finance. Although the IFCT, which is essentially an industrial development bank, provides long term loans to a number of projects, its operations are still quite small and, in practice, its fixed rate finance is limited to a maximum term of a few years.
Furthermore, the financial system is also somewhat concentrated in the Bangkok metropolitan area which leads to inadequate fund injection and mobilization of savings in rural areas. Over two thirds of total commercial bank deposits are in the Bangkok metropolitan region.
Another source of finance which should not be underestimated especially in light of the centralized nature of organized financial services, are the unofficial financial markets. These markets conduct a large number of relatively small financial transactions, which are short term in nature. For the majority of rural farmers, small scale business enterprises and urban households, this unorganized market fulfills many of the needs which are not being satisfied elsewhere.
Interest Rates
Interest rate movements in Thailand are governed by the demand and supply of loanable funds, and hence the liquidity situation in the country. Bank of Thailand interventions in the market are kept at a minimum in the setting of interest rate ceilings on loans and overdrafts, savings and time deposits and the average repurchase rate (the average rate at which the Bank of Thailand will purchase and sell commercial bank loan notes).
Historically, interest rates in Thailand have been high. In 1987, however, the liquidity situation eased when the money supply (M2) increased by 20% as compared to only 11% in 1986. Higher liquidity in the domestic market and the introduction of Bank of Thailand policies to stimulate the economy caused interest rates to decline. The minimum lending rate (MLR) fell from 15.5% in 1985 to 11.5% in 1987.
In 1988, however, the liquidity in the system tightened gradually as commercial banks’ private credit grew more rapidly than deposits, causing domestic interest rates to rise in the second half of the year. This imbalance of demand and supply for credits continued into 1989 and interest rates were gradually driven up. The MLR stood at 12.5% in September, 1989 and deposit rates were at their ceiling level.
If the tight money situation continues, the government may be forced to ease liquidity in order to facilitate investment spending. The dilemma that will be faced is one of trying to keep a balance between monetary growth (so as to maintain the level of interest rates) and inflationary pressures. Another problem will be to set the appropriate level of interest rates which would raise the level of deposits in the banking sector, while maintaining a high enough differential with international interest rates so as to attract overseas capital and, at the same time, not be damaging to economic growth.
Stock Market
Traditionally, business in Thailand has been financed mainly by short term debt rather than by equity. This is reflected in the relatively high debt/equity ratios among Thai businesses. Although the Thai stock market is still small and relatively under-developed in comparison with Hong Kong and Singapore, the Securities Exchange of Thailand (SET) has enjoyed tremendous growth over the past few years, with market capitalization as a percentage of GDP rising from 5% in 1985 to 15% in 1988.
This growth was accompanied by the establishment of a second board with lower listing requirements in order to encourage the listing of small and new companies.
The largest share of market capitalization is taken by the banking sector, which accounts for some 40% of the total. Over the years, however, the construction sector has increased its share significantly.
Foreign investment on the SET accounts for about 15% of total investment. Ceilings on foreign ownership in individual stocks - usually about 25%, but not higher than 49% - have effectively limited the capacity of the market to absorb foreign funds.
The next few years should see further development of both the demand and the supply side of the local capital market. At present there are less than 300,000 shareholders, a small percentage of the 56 million population. The government has tried to encourage investment by providing tax incentives to domestic investors. There is no additional capital gains tax for Thais and dividend income is taxed the same as interest income, at 15%. The government has also helped develop the Mutual Fund industry and has allowed direct and indirect foreign investment.
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