Local financial development and growth

Using a unique sample of net domestic product data for districts in India, I investigate the connection between banking sector development, human capital, and economic growth at the sub-national level. Using disaggregate data avoids many of the omitted variable problems that plague cross-country studies of the finance-growth connection and facilitates an instrumentation strategy. The findings show that the growth of many districts in India is financially constrained due to lack of banking sector development, and that the relationship between finance and growth may be non-linear. For the districts in the sample, moving from the 75th percentile of credit/net domestic product to the 25th percentile implies an average loss of 4 percent in growth over the 1990s. This indicates that the gains from increased banking sector outreach may be large. The analysis shows that human capital deepening can reduce the effect of the financial constraint and help decouple growth from financial development. In a district at the 25th literacy percentile, the implied growth loss due to a constrained banking sector is twice as large as in a district at the 75th literacy percentile. Thus, higher levels of human capital may activate alternative growth and production channels that are less finance intensive.Banks&Banking Reform,Access to Finance,,Economic Theory&Research,Debt Markets

Financial Sector Deepening and Economic Growth: Evidence from Turkey

This paper analyzes the effects of financial sector deepening on economic growth using a province-level data set for 1996-2001 on Turkey. This period is associated with a weakly regulated and relatively unsupervised expansion of the banking sector which led to the 2001 financial crisis. Contrary to findings in the previous literature, our results indicate a strong negative relationship between financial deepening-both public and private-and economic growth. In light of the developments in the period of analysis, this result is not surprising, as the main function of the banking sector at that time was to provide financing for the Turkish Treasury, which channeled these funds to the government-albeit mainly for rent distribution purposes. However, it is important to note that the growth of private banking sector needs yet to be examined separately, as government ownership of banks may distort the development of the banking sector as a whole. Yet, it is possible to conclude that financial development may not always contribute to economic growth, and the conditions under which such a contribution takes place should be investigated further.Financial sector; Economic growth; Panel data; GMM; Turkey

Banking Sector Reforms and Economic Growth: Recent Evidence From a Reform-Bound Economy

This research investigated the banking sector reforms and economic growth using time series data from 1970 to 2013 for the Nigerian economy. Autoregressive Distributed Lags (ARDL) Bounds test was applied for the specific determination of the long and short-run relationships between banking sector reforms and economic growth. The research finds that the interest rate margin is more significant than other variables in the model in explaining the banking sector reforms and economic growth. Banking sector credit to the private sector was negative and statistically insignificant in economic growth in Nigeria. This means that the size of the banking sector does not enhance economic growth. Meanwhile, inflation is negatively and statistically significant in economic growth. The duration of banking sector reforms should be defined and strictly adhered to irrespective changes in the political administration of the country

Determinants of Capital Structure in Financial Institutions: The Case of Turkey

This study analyzes the determinants of capital structure in the Turkish banking sector. We propose an empirical model in order to identify the factors that explain why banks hold capital beyond the amount required by the regulation. We used a panel data set that employs bank-level data from the Turkish banking sector covering the period 2002–2006 and estimated the model with generalized method of moments (GMM). The findings of this study suggest that lagged capital, portfolio risk, economic growth, average capital level of the sector and return on equity are positively correlated with capital adequacy ratio and share of deposits are negatively correlated with capital adequacy ratio.Capital Adequacy, Turkish Banking Sector, GMM

Productivity in endowments : sectoral evidence for Hong Kong's aggregate growth

The author provides sectoral evidence that sheds new light on the current debate regarding the sources of growth of the East Asian miracle. The author tests both the productivity-driven and endowment-driven hypotheses using Hong Kong's sectoral data. The results show that most of the growth in the services sector is driven by the rapidly accumulating capital endowments, and not by productivity growth. In addition, productivity growth in the manufacturing sector is also unimpressive. The manufacturing sector is more labor intensive and its growth is hindered by the reallocation of resources into the services sector as a result of the growth of capital endowments and imports. Overall, sectoral evidence supports the endowment-driven hypothesis for Hong Kong's aggregate growth.Water and Industry,Banks&Banking Reform,Environmental Economics&Policies,Economic Theory&Research,Industrial Management,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Economic Growth,Industrial Management

Credit Expansions and Financial Crises: The Roles of Household and Firm Credit

The literature has identified credit expansions to the private sector as an important predictor of financial crises in developing countries. We extend the literature by decomposing credit into credit extended to households and credit extended to firms. We compile a unique disaggregated data set and find evidence that household credit growth and firm credit growth have positive, distinct, and statistically significant effects on the likelihood of banking and currency crises. Furthermore, household credit growth is a particularly important predictor of banking crises in countries with a high propensity to consume. Working Paper 06-5

The determinants of banking crises : evidence from industrial and developing countries

In the 1980s and 1990s several countries experienced banking crises. The authors try to identify features of the economic environment that tend to breed problems in the banking sector. They do so by economically estimating the probability of a systemic crisis, applying a multivariate logic model to data from a large panel of countries, both industrial and developing, for the period 1980-94. Included in the panel as controls are countries that never experienced banking problems. The authors find that crises tend to occur in a weak macroeconomic environment characterized by slow GDP growth and high inflation. When these effects are controlled for, neither the rate of currency depreciation nor the fiscal deficit are significant. Also associated with a high probability of crisis are vulnerability to sudden capital outflows, low liquidity in the banking sector, a high share of credit to the private sector, and past credit growth. Another factor significantly (and robustly) associated with increased vulnerability in the banking sector is the presence of explicit deposit insurance, suggesting that moral hazard has played a major role. Finally, countries with weak institutions (as measured by a"law and order"index) are more likely to experience crises.Labor Policies,Payment Systems&Infrastructure,Financial Intermediation,Banks&Banking Reform,Financial Crisis Management&Restructuring,Financial Economics,Banks&Banking Reform,Financial Crisis Management&Restructuring,Financial Intermediation,Insurance&Risk Mitigation

Participation Banking Competitiveness (A Theoretical Review of Pakistan’s Islamic Banking Sector)

This paper theoretically reviews the performance and growth of participation banking industry of Pakistan. Secondary data is obtained from central banks, commercial banks, DFIs and organizations involved in financial research.  In addition, financial data of the four participation (Islamic) banking operating in Pakistan has been sought to determine the issues, bottlenecks and opportunities present in the participation banking sector of Pakistan. In relation to the conventional banking sector, this research finds higher proportional increase and growth for participation banking sector as depicted by their financial indicators like leverage, cost to income ratio, asset growth, financing growth, investment account growth (YoY). In contrast, conventional banks present a far better picture in their financial indicators of total banking assets, financing assets, investment accounts and they performs better with respect to return on assets, return on equity , revenue/asset ratio and non-financing income ratio. Based on the above analyses, it can be concluded that participation banking has a great potential for growth in near future and with better image-building and perceptual shift regarding Islamic modes of finance, extensive growth could be expected. Keywords: Competitiveness, Participation Banking, Conventional Banking, Financial Indicator

Do efficient banking sectors accelerate economic growth in transition countries?

The relationship between financial sector and economic growth in transition countries has been largely ignored in the earlier empirical literature. In this paper, we analyse the finance-growth nexus using a fixed-effects panel model and unbalanced panel data from 25 transition countries during the period 1993-2000. We measure the qualitative development in the banking sectors using the margin between lending and deposit interest rates. Our second variable for the level of financial sector development is the amount of bank credit allocated to the private sector as a share of GDP. According to our results, the interest rate margin is significantly and negatively related to economic growth. This outcome is in line with theoretical models and has important policy implications. On the other hand, a rise in the amount of credit does not seem to accelerate economic growth. The main reasons behind this result could be the numerous banking crises the transition countries have experienced and the soft budget constraints that are still prevalent in many transition countries. Due to these specific characteristics the growth in credit has not always been sustainable and in some cases it may have led to a decline in growth rates.financial sector, transition economies, economic growth, panel data

Banking sector depth and economic growth nexus: a comparative study between the natural resource-based and the rest of the world’s economies

This paper investigates the relationship between banking sector depth and long-term economic growth in the natural resource based economies vis-à-vis economies that are not dependent on natural resources. For the empirical investigation, a Generalised Method of Moments (GMM) estimator for dynamic panel-data models is adopted for 194 countries spanning the period 1964 to 2013. By using different measures of banking sector depth and economic growth, the investigation yields three key findings. First, the banking-growth relationship is non-linear and positive within certain levels of banking sector depth in both country groups. Second, the time lag between the change in the level of banking sector depth and the effect on economic growth is shorter in the natural resource-based countries than in the other countries. Finally, the total effect of banking sector deepening on long-term economic growth is weaker in economies with abundant natural resources than in the rest of the world