- 8 -

into accumulation of financial assets.<sup>7</sup> The monetization of the economy led to a complementary rise in credit. Credit to the private sector stood at 59 percent of GDP at the end of 1987, up from 41 percent in 1980. The Thai system was also bank-oriented, with more than 67.5 percent of financial assets in banks, and with limited financial intermediation through mutual funds and other type of institutional investors. Bond and stock markets remained relatively underdeveloped, with oustanding bond market issues accounting for only 11.5 percent of GDP at end 1989, and stock market capitalization amounting to 35.5 percent.!

# **a. Structure of the Financial System**

As of 1987 Thailand's formal financial system consisted of commercial banks, finance companies, credit foncier companies, Government Savings Banks, private and government insurance comnpanies, and a number of sectorally and functionally specialized financial institutions. Commercial banks were the central players in the system absorbing 80.9 percent of deposits and accounting for 73.1 percent of total financial system assets<sup>9</sup> . Finance and securities companies accounted for 9.5 percent of total system deposits and 12.7 percent of total finarncial system assets. Specialized government banks had captured 9.5 percent of total financial system deposits and 14.2 percent of total financial system assets. '°

**_Commercial Banks._** At the beginning of 1988, the Baht 943 billion of commercial banks assets (equivalent to 72.5 percent of GDP) were held by 15 domestic commercial banks and 14 foreign banks. Although the number of foreign banks was almost equal to the number of domestic banks, they together accounted for around only _5_ percent of commercial banking assets.'" Their small market share was the result of tight government restrictions, which severe:ly limited their activities and hampered their ability to compete with domestic banks.'<sup>2</sup> Ihailand's banking industry was concentrated and characterized by an oligopolistic market structure. The largest bank in the market, Bangkok Bank, had a market share of 28 percent at end 1988. The bulk of the commercial banking system

- 7 World Bank (1990). However, savers in Thailand had traditionally few alternatives to investments in bank or finco accounts and direct investment in the equity market. More recently, the deregulation of the mutual funds industry has opened up alternative avenues for investments, e. g., in 1992, licenses were granted to seven fund management companies.

- 8 The World Bank, 1995.

- 9 Excluding insurance companies and credit foncier institutions.

- 10 As the specialized banks are of minor importance for the analysis performed in the paper, the following sections will only focus on commercial banks and finance companies.

- I I Bank of Thailand, Monthly Bulletin, and World Bank (1990).

- 12 Foreign banks faced the following three main restrictions: (i) foreign banks were hampered in their deposit mobilization activities as they suffered from a prohibition of branches (only two grandfathered sub-branches exist); (ii) they faced a 35 percent income tax which is higher than the tax rate domestic banks are subject to (as they can be listed on the SET, their income tax rate is 30 percent); and (iii) they paid a 16.5 percent witholding tax on dividends transferred overseas. Thus, foreign banks mainly focussed on financing of international trade transactions; while they are active in the foreign exchange market, most of their business relates to trade transactions of their own clients, See for more detail World Bank (1990).