The impact of banks and non-bank financial institutions on economic growth

Abstract

Empirical studies examining the relationship between financial sector development and economic growth without including non-bank financial institutions (NBFIs) will likely generate biased empirical results. This study provides evidence that NBFIs can have a statistically significant negative impact on economic growth using cross-country data for both emerging and advanced countries. This finding suggests that these non-bank institutions, often loosely regulated, may introduce an excessive level of risk into the financial sector and the general economy. It is consistent with the current global financial crises where NBFIs, such as investment banks and insurance companies, introduced an excessive level of risk into the global economy. Hence, policy-makers may need to consider more timely and effective regulation of NBFIs and insure that adequate transparency and disclosure is provided to all financial markets participants.

Entrepreneurship and Economic Growth: Does Entrepreneurship Bolster Economic Expansion in Africa?

“…Investigations into the relationship between finance and economic growth have reported conflicting outcomes. Whereas studies such as Jalil and Feridun [29], Tran [30], Waqabaca [31], Levine et al [32] find a positive relationship between finance and growth, studies such as Adusei [33,34], Hye and Islam [35], Adusei [36], Liang and Reichert [37] and Ram [38] report a negative relationship between the two. Few studies have reported an insignificant relationship between finance and growth [39,40].…”

Entrepreneurship, Financial, And Economic Development: A Literary Review

“…The research work of Liang and Reichert (2012) found a negative relationship between non-bank financial institution and economic growth for both developed and developing countries. It believed that the negative results for the developed countries are not justified by the trends but might reflect the lack of adequate regulatory supervision (Liang & Reichert, 2012) and unacceptable speculative management style of the large non-bank financial institutions which endangered customers' wealth and the financial system. The recent value destruction from the very systemically important non-bank financial institutions might explain this exposition.…”

“…Liang and Reichert (2012) suggest that at low level of economic growth, the relationship is likely to be demand following economic development because financial intermediation services are typically low at that level but picks up as development accelerates. At higher levels of development, financial intermediation role assumes a leading role in resource allocation and risk diversification (Liang & Reichert, 2007).…”

“…These initiatives are meant to stimulate the growth of insurance business in congruence with the preposition that insurance is demandfollowing economic development (Liang & Reichert, 2012). As the market continue to reshape for growth, few banks have divested its insurance and non-core financial institutions while some like IBTC, UBA, First Bank are consolidating by establishing holding company (hold co) structure and continue to run its insurance and other non-core financial institutions through the hold co vehicle.…”

“…According to Liang & Reichert (2012), non-bank financial institutions may have systemic importance to the overall financial system by virtue of first, the nature of their portfolios, second, the relative size of their portfolios and lastly their business orientation. The continuing decline of net interest spreads (Fitzpatrick, 2012, Bernstein, 2007) associated with traditional banking services encouraged banks to focus on fee income revenues typically from corporate finance services, off balance sheet items like commercial papers, and risk diversification instruments like derivatives (Sundaram& Willey, 2009), which appears to have equal market appeal to all financial players, non-bank and bank financial institutions alike.…”