The Impact of Banking Sector Development on Economic Growth: The Case of Vietnam’s Transitional Economy

Abstract

The objective of this paper is to examine the role of the banking system in the growth of the Vietnamese economy in the process of the transition that started in the early 1990s. An ARDL approach-based multivariate regression technique is applied to shed light on the impact on the growth of banking development, which is measured by broad money and bank credit. The empirical findings confirm a positive long-term effect of banking development on growth, reflecting the important role of the banking system in a typical bank-based financial system in mobilizing and supplying capital to the economy, thus contributing to growth throughout the process of economic transition. The empirical findings also indicate a nonlinear effect and a diminishing marginal effect of banking development in the sub-period 2007–2020. The thresholds for the two measures of banking development are estimated to be around 107% and 101% of the GDP, respectively. This finding suggests that bank credit expansion needs to be closely controlled to be adaptive to the capital-absorptive capacity of the economy. To a certain extent, this finding is also an indicator of the ongoing extensive growth model adopted in Vietnam, which relies heavily on the quantity of invested capital.

Banking sector development and economic growth nexus in BRICS

“…Consistent with Nguyen (2022), the The final group of researchers agree that the influence of the banking sector on economic growth occurs through channels or that there must be some absorption capacities in the economy. Levine (1997) also argued that the economic growth influence of the banking sector is non-linear, and it occurs through capital accumulation and technological innovation.…”

“…The absorption capacity view that says that certain variables must be in place to enable economic growth inspired by the banking sector is supported by Nguyen (2022). Nguyen (2022) studied the causality between the banking sector and economic growth in Vietnam using ARDL and 2007-2020 time series data.…”

“…Levine (1997) also argued that the economic growth influence of the banking sector is non-linear, and it occurs through capital accumulation and technological innovation. Despite these views by Levine (1997) and Nguyen (2022), empirical research that investigated the various avenues through which the growth of the economy is affected by banking sector development are very scant.…”

Unraveling the Fintech Landscape: A Systematic Mapping Study on the Impact of Financial Technology Innovation on Investment Decision-Making in ASEAN Banking

“…FinTech businesses use technology to streamline financial procedures, cut expenses, and offer cutting-edge financial goods and services. These developments can significantly affect the finance sector and stimulate economic growth (Nguyen, 2022). It is true that financial technology innovations can sometimes result in overreactions in the short term for investment.…”

Determinants of Financial Performance of Commercial Banks: Evidence from Indonesia

“…Commercial banks in Indonesia have a big role in the country's development in terms of economy and wealth, encouraging saving habits in the community and channel funds for productive use (Bhegawati & Utama, 2020). The growth of any country is possible only after the establishment of a healthy banking system (Nguyen, 2022). Therefore, banks are carriers of economic development vehicles.…”