Banking sector development and economic growth in developing countries: a bootstrap panel Granger causality analysis

Abstract

The purpose of this paper is to revisit the Granger causal relationship between banking sector development and economic growth for forty developing countries in the period 1970-2012. In order to capture the different aspects of banking sector development, we develop two banking sector development indices and apply the panel bootstrapped approach to Granger causality testing approach properly taking into account cross-sectional dependence and heterogeneity issues. The empirical results show limited support for the supply-leading, demand-following and complementarity hypotheses. Our results also provide evidence as the causal relationship between banking sector development and economic growth exists in twenty five countries.

Asymmetric Impact of Financial Intermediary Development in Low- and High-Income Countries

“…On the other hand, an increasing body of the literature investigates financial intermediary development across countries. For example, previous studies reveal the impact of financial intermediary development on economic growth, such as those of Cheng and Hou [6], Levine et al [7], and Mhadhbi et al [8]. Cheng and Hou [6] examined the impact of financial intermediation and non-intermediation services on economic growth for eight Organization for Economic Cooperation and Development (OECD) countries.…”

“…Levine et al [7] suggested that financial intermediary development impacts positively on economic growth; moreover, the differences in accounting systems and legal origins among countries significantly account for different degrees of financial development. Similarly, Mhadhbi et al [8] investigated the relationship between financial intermediary development and economic growth for forty developing countries during the period 1970-2012. They found that there is a causal relationship between financial intermediary development and economic growth in twenty-five countries.…”

Banking sector stability and economic growth in post‐transition European Union countries

“…The importance of the banking sector in economic growth has been recognized in the literature since the 18th century (Mhadhbi, Terzi, & Bouchrika, 2017), but modern empirical literature in this area has been developed since the 1990s (Petkovski & Kjosevski, 2014). Levine (2005) defined five functions of the banking/financial sector that facilitate economic growth: ( i ) providing ex ante information about possible investments and allocating capital; ( ii ) monitoring investments and exerting corporate governance after providing credit; ( iii ) facilitating trading, risk diversification, and risk management; ( iv ) mobilizing and pooling deposits, and ( v ) facilitating the exchange of goods and services.…”

Growth of Universal Banking in the Philippines: A Correlational Study with Economic Growth

“…Mhadhbi, Terzi, & Bouchrika (2017) revisited the Granger causal relationship between development of the banking sector, and economic development of 40 developing countries from 1997 to 2012. According to the study, none of the banking sector development indices caused economic growth in about 57% of the sampled countries, while 62% of the countries showed a causal relationship between banking sector development and economic development (Mhadhbi, Terzi, & Bouchrika, 2017) The study of Tongurai & Vithessonthi (2018) explored the impact of banking sector development in changes in economic growth and structure, using a wider sample consisting of all countries in the world from 1960 to 2016. The study found banking sector development has a negative impact on agricultural sector development among countries with high degrees of development in the banking sector; while banking sector development has no impact on industrial sector development (Tongurai & Vithessonthi, 2018).…”

“…Even with various proxies used for banking growth, the results are common in different parts of the world, and that is, banking and the role of banks in economic growth cannot be argued. Even with various researches made around the world, very little was found focusing specifically in the Philippines, except for the study of Mhadhbi, Terzi, & Bouchrika (2017) which included Philippine's data in its roster of developing countries samples. This motivated this researcher to find out if universal banks growth in the Philippines which comprised more than 90% of the sector are significant in the economic development of the country, using the period 2010 to 2018.…”