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assets was accounted for by four banks, one of which is government-owned (Krung Thai Bank). Their combined market share amounted to 63 percent of total banking system assets (end 1988 figures).'<sup>3</sup> These four banks also dominated the interbank loan market since they were the main supplier of liquidity for smaller and foreign banks. In addition, they were the leading players in foreign exchange transactions and thus could exert a degree of control on the supply of foreign exchange. The oligopolistic structure and the lack of the threat of new entry (the last time a domestic banking license was grantecl was in 1965) hampered innovation and diversification in the financial system.

Commercial banks financed their activities mostly via time deposits, which at end 1987 commanded an average share of about 70 percent of total banking system deposits, followed by savings deposits that accounted for about 30 percent of total banking system deposits. At end 1987 commercial banks were relatively independent from foreign funding: borrowings from abroad accounted for only 3.9 percent of total liabilities.

Commercial banks focussed their activities on straight out lending activities: noninterest income only amounted to 18 percent of the net operating income in 1 987.'4 As a result, at end 1987 loans to total assets amounted to 73 percent, and were dominated by overdrafts, which accounted for an average of around 65 percent of bank crecLit. In their lending activities commercial banks tended to rely more on collateral rather than on evaluation of project viability, borrower creditworthiness, or cash flows. Regarding the scope of permissible activities, banks were not allowed to engage in any securities activities including brokerage of bonds and equities.

_Finance Companies._ Finance companies constituted the second largest segment of the financial system and were the most important nonbank financial institutions. At the end of 1987, this segment was characterized by a large number of companies with a wide size range. Of the 93 institutions 26 were affiliated with private Thai commercial banks, and a further 12 with the government-owned Krung Thai Bank."<sup>5</sup> These affiliated companies were created to provide specialized services that banks were not allowed to provide (e.g., securities business) or as specialized and innovative providers of highmargin high-risk consumer finance. In contrast to banks, finance companies faced stiff competition not only from other finance companies but also from banks, that once services proved successful at the finance company level started to introduce similar services. Moreover, finance companies faced a credible threat to entry as, in contrast to the banking sector, new institutions entered the market. While finance companies were

> 13 Figures according to Bank of Asia cited in World Bank (1990). The Herfindahl index, a measure commonly used to measure concentration in an industry, also suggests that the Thai banking system was highly concentrated. If the index is adjusted for market size, among 15 developing countries Thai's banking system had the third highest concentration in the late 1980s. World Bank (1990).

- 14 World Bank (1990).

- 15 While a single shareholder of a finance company cannot hold more than 10 percent of total shares legally, in practice, banks have complete control over their affiliated company. The legal restriction on the extent of ownership by one financial institution in another have only resulted in a complex network of multiple and cross ownership between commercial banks and securities and finance companies, and the ownership structures have become highly opaque. World Bank (1990).