Microsoft Word Thesis Gent (1). doc

Figure 9. Growth rate of credit and M2 (y-o-y, %) 
Source: Czech National Bank, 2000
Transition period during 1994-1995 of economy in Czech Republic went through two 
phases of credit and money cycle, which helped economic activity to raise money 
supply and budget constraints for financial institutions, which resulted by foreign 
capital inflow and not by internal economy. Due to these phases, real GDP of Czech 
Republic faced an increase and has been recorded as largest in overall the period of 
transition since it began, (Hampl & Matousek, 2000).
Banking framework in the Czech Republic needed improvements regarding credit 
cycle, as the monetary turbulence of 1997 caused the decline in lending and replacing 
the credit with safer trading in government securities. At that time banks issued loans to 
people that did not meet several conditions that a borrower should meet, as they had 
short credit history, not the required experience. This meant that the loans were not in 
line with the legislation, there were problems with small and medium banks, while at 
the same time there was the economic recession. With these conditions created, in 
Czech Republic there were created large number of classified loans, thus, in 1998 the 
banks decreased the number of loans that were issued to private borrowers. Hence, 
volume of credits declined in years 1999-2004. As the volume declined until 2004, after 

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2004 the volume started to increase slowly as banks begin to issue mortgage and 
consumer loans to households.
Figure 10. Credits provided to private and public sector in Czech Republic during 
period 1999-2004 (mil. CZK) 
Source: Czech National Bank, 
During the transformation period in 1990s the banking sector in Czech Republic was 
concentrated, where the largest banks had 66% of market share due to their asset 
volume. Comparing these large banks to the European ones, they were less efficient 
than the banks in other states in Europe, as they did not have wide range of services and 
were inefficient. Moreover, the small and medium size banks in the Czech Republic 
rapidly expanded in the beginning of 1990s up to twenty banks. Even though, there was 
a rapid development of banking sector and presence of foreign banks in the system, 
nineteen of these domestic banks stopped their activities or merged with other banks 
because of their low efficiency in comparison with foreign banks. 
These banks had 
lower percentage of market share due to their total assets, but their importance was that 
they issued loans to new business being small or medium size, (Hampl & Matousek, 
2000). 
Furthermore, the decreased volume of credit and the decreased growth rate in the Czech 

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Republic impacted the economy negatively. Furthermore, with these negative impacts 
of the banking system, the domestic banks of Czech Republic suffered more. Thus it is 
necessary to find other ways in capital markets to finance those in need in the standard 
market economies. Regarding the Czech Republic, these other ways of financing are 
slightly fulfilled. Thus, it shows that banks play quite an important role for financing in 
the Czech Republic, as in other EU member states, (Vodova, 2010).