“Banking sector development and economic growth nexus in BRICS”

The paper examined the influence of the banking sector on economic growth in the BRICS countries using panel data analysis methods (1987–2020). The effect of the complementarity variable on economic growth in BRICS was also explored using the same data set. The lack of agreement in the empirical literature on the relationship between banking sector development and growth motivated this study. The study was also motivated by the desire to deal away with the omitted variable bias which is to a very large extent plagued the available literature on the influence of the banking sector on economic growth. Panel data analysis included fixed effects (FE), fully modified ordinary least squares (FMOLS), and pooled ordinary least squares (OLS). It was observed that the banking sector had a significant positive effect on economic growth under the pooled OLS (all three models) and fixed effects (model 1). Model 2 under the fixed effects indicate a negative significant relationship moving from the banking sector towards economic growth. FMOLS (models 1 and 2), pooled OLS (models 1, 2 and 3), and fixed effects (model 1) show that the complementarity variable enhanced economic growth significantly. Policies aimed at enhancing banking sector development and domestic investment should be implemented without delay by the BRICS countries if they intend to bolster economic growth.


INTRODUCTION
The positive role of the banking sector development in the economy is no longer contestable.Levine (1997) noted that the banking sector helps to mobilize savings for investments, allows efficient allocation of resources, provides liquidity in the economy, enables easy risk management in the economy, and helps facilitate domestic and international trade.Such arguments were supported by Pagano (1993), Diamond and Dybvig (1983), Osinubi (1998), Goldsmith (1969), McKinnon (1973), Townsend (1983), Shaw (1973), and Schumpeter (1911).
Empirical studies on the impact of the banking sector on economic growth have been conducted by several researchers.Findings are mixed, diverse and divergent.For example, majority noted that economic growth is enhanced by the banking sector ( 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.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.

LITERATURE REVIEW
Theoretically, there are five avenues through which economic growth is affected by the financial sector.Firstly, the financial sector enables small investors to less costly participate in collective investment schemes thus promoting diversification and risk management.According to Pagano (1993), such schemes allows huge amounts of financial resources to be pooled together and directed towards economic sectors that are productive.However, the role played by domestic investment in promoting financial sector development's impact on economic growth has so far received minute attention.
A financial sector enables depositors to manage liquidity risk through allowing them to use their illiquid financial assets as collateral security when borrowing money to engage in long term productive projects (Diamond & Dybvig, 1983).The theoretical perspective was supported by Osinubi (1998).
According to McKinnon (1973) and Goldsmith (1969), the financial sector enhances economic growth through savings mobilization, availing funding to firms and individuals intending to invest in productive projects, risk management services provision and provision of efficient information dissemination services in the economy.The theoretical perspective was supported by Townsend (1983) and Shaw (1973).Schumpeter (1911) argued that the financial sector is a leader in research, technological innovation and allocating financial resources efficiently towards production of new innovative products in the economy.Savings pooling, investment in highly productive projects and risk diversification functions of the financial market was also supported by Schumpeter (1911).
There are several empirical studies that show that the banking sector inspires economic growth, and they fall into five categories.The first is empirical research, which found out that economic growth is enhanced positively by the banking sector.The secondly is the empirical literature, which noted that the economy is negatively influenced by the banking sector.The third is the group of empirical researchers who observed that economic growth and the banking sector affect each other.Empirical research, which observed that the banking sector and economic growth are not related or are connected in a non-significant manner falls into the fourth category.Fifthly, other empirical studies produced findings that show that the banking sector affects economic growth indirectly through channels such as domestic investment, human capital development, technology, etc.
The limited empirical literature on how the banking sector influences economic growth can be divided into five categories.The positive effect, negative perspective, bi-directional relationship, non-existent/insignificant argument and the absorption capacity category.Commercial banks' liquid liabilities exerted a significant enhancing effect on economic growth in Nigeria in the long run.In contrast, the private sector deleteriously affected economic growth in Nigeria.
Ibrahim and Abdalla (2020) explored the economic growth-banking sector nexus in Sudan using the autoregressive distributive lag (ARDL).In the short run, deposits (% of GDP) enhanced economic growth, whilst in the long run, there was no relationship between the two variables.Abusharbeh (2017) examined the growth-banking sector nexus using Palestine as a focal point using ordinary least squares (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015).Banking credit had a significant enhancing impact on economic growth, whilst customer deposits, interest rate and the number of bank branches had an insignificant enhancing influence on economic growth.Hammami and Smida (2022) examined the nexus between the banking sector and eco-nomic growth in Tunisia using multi-regression analysis with data spanning from 1980 to 2017.It was noted that the positive impact of the use of bank deposits on economic growth in Tunisia is statistically insignificant.
In the context of EU countries, Rushchyshyn et al. (2021) explored the interrelationship between the banking sector and economic growth using panel data analysis approaches (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018)(2019).Economic growth was enhanced significantly by the banking sector in EU selected countries, including Ukraine.In emerging markets, Masoud and Hardaker (2012) explored the economic growth-financial development nexus using panel data estimation methods.A unidirectional causality relationship was detected running from the banking sector towards the growth of the economy, whilst a long-run relationship between economic growth and stock market development progress was also observed.The banking sector-growth nexus in Pakistan using multiple regression analysis with time series data (2008-2012) was studied by Hamza and Khan (2014).Economic growth in Pakistan was significantly enhanced by loan advances, bank deposits, bank investments and profitability.
Tongurai and Vithessonthi (2018) explored the linkage between the banking sector and economic growth employing the panel data analysis  for the countries of the world.A negative influence of the banking sector on agricultural sector production and growth was observed.Hammami and Smida (2022) observed that broad money had a deleterious impact on the growth of the economy in Tunisia.In the context of Nigeria, Abubakar and Gani (2013) produced results that show that private sector credit had a negative influence on the economy during the period under study .Ahmed et al. (2019) showed a feedback relationship between the banking sector and economic growth.Using Bangladesh as a focal point, a study on the growth-banking sector nexus with vector error correction model (VECM) and time series data (1980-2016) was done by Ahmed et al. (2019).Feedback relationship between the two variables was observed.Empirical research that noted that the relationship between the two variables is insignificant or non-existent include Hui and Jha (2013).Using Granger causality tests, Hui and Jha (2013) examined the growth-banking sector nexus in Nepal using the 1975-2010 period time series data.Loan and advances, deposits and banking assets had no causality relationship with growth in Nepal.
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.
Consistent with Nguyen (2022), the banking sector enhances economic growth through its ability to convert savings into investments.This was captured in equations ( 2), ( 3) and ( 4) through the inclusion of the complementarity variable (banking sector development x domestic investment).For this reason, this paper studied if domestic investment is an avenue through which the banking sector affected the economic growth.
In line with Abusharbeh (2017), the study expects an economic growth triggered by the banking sector through the domestic investment channel.Pooled OLS, fixed effects and the FMOLS were used.
Control variables are discussed next.Haq (2012) argued that domestic investment is a productive factor that increases capital formation and enhances growth.The author noted that domestic investment increases the quantity of economic activities in the country hence paving a way to produce new goods and services that enhances economic growth.In this paper, economic growth is expected to be enhanced by domestic investment.Domestic investment in this study was proxied by gross capital formation.
According to Romer (1999), foreign direct investment brings in new technology, skills, human capital development, physical capital and reduces unemployment, which are all important elements for growth.Over-reliance on FDI leads to long-term negative consequences for the economy and income distribution in the host country (Bornschier & Chase-Dunn, 1985).According to the literature, economic growth enhanced by foreign direct investment could be either way.Net foreign direct investment as a ratio of GDP is a proxy for FDI employed.
Trade openness negatively affects the economy if citizens and domestic firms prefer to purchase their inputs and/or products from other countries even if they can be found locally (Baltagi et al., 2009).This kills the local industry and is not good for long-term growth.Trade openness allows local firms to actively participate in international financial and commodity markets, hence enabling them to bring foreign currency and buy inputs and commodities at competitive prices (Coe & Helpman, 1995).Such benefits allow the local industry and economy as a whole to expand and grow.Trade openness affects economic growth either way.Total trade as a ratio of GDP is a proxy for trade openness used.Fedderke and Garlick (2008) argued that infrastructural development was an engine and a necessary element for economic growth.Infrastructural development employed fixed telephone subscriptions (per 100 people) as its measure.Infrastructural development is anticipated to enhance growth.
Consistent with Adarkwa (2015), personal remittances flow is paramount in ensuring the labor sending economy in the following ways.The study mentions that it happens through its ability to provide capital or funding for (1) small projects by people back home, (2) educational fees (both high school and tertiary education).The expectation is that economic growth is enhanced by personal remittances in this study.Personal remittances received as a ratio of GDP was used as a measure of personal remittances for the purposes of this study.Pradhan and Abraham (2002) argued that the educated, skilled and health people are better able to contribute to economic growth through bringing in new ideas, technical expertise and technological innovations.Human capital development's positive effect on economic growth is expected to manifest.The human capital development index is used as a proxy for human capital development.

METHODOLOGY AND DATA
Panel data Domestic credit to private sector (% of GDP) was used in equation ( 1), whilst broad money supply as a ratio of GDP was used in equation (2).Monetary sector credit to private sector as a ratio of GDP is the banking sector proxy used in equation (3).

RESULTS
This section focuses on trend analysis, panel unit root tests, co-integration tests and final analysis.According to Figure 1   The results show that a long-run relationship between the variables existed, and there are at most seven co-integrating vector relationships between and among the variables.Model 1 used the ratio to GDP of domestic cred-it to private sector, model 2 employed the broad money supply ratio to GDP, whilst model 3 made use of the monetary sector credit to private secas a ratio of GDP measure of banking sector development.

Table 3. Fixed effects results
Source: Author's calculations.

Variables
Economic growth    Model 1 across the three panel methods shows that growth was improved significantly by the complementarity aspect (banking sector development x domestic investment).Similar results were observed in (1) model 2 under pooled OLS and FMOLS and in (2) model 3 under the pooled OLS approach.This is in line with Nguyen (2022), whose study noted that certain variables must be in place to enable banking sector development to significantly enhance economic growth.Fixed effects (models 2 and 3) and FMOLS (model 3) produced results indicating that growth was enhanced by the complementarity variable in a non-significant manner, results that generally support the findings of Nguyen (2022).

CONCLUSION
This paper explored the impact of the banking sector on growth in BRICS employing panel data (1987-2020) analysis methods.The impact of the complementarity variable on economic growth in the BRICS countries was also examined using the same data set.A lack of agreement in the empirical literature available on the banking sector development-growth nexus triggered the author to add his voice on the subject matter.The study was also motivated by the desire to deal away with the omitted variable bias that to a very large extent plagued the available empirical literature on the influence of the banking sector on growth.Banking sector was observed to have a positive and significant impact on economic growth under the pooled OLS (all three models) and fixed effects (model 1).Model 2 under the fixed effects shows a negative significant influence of the banking sector on growth.FMOLS (models 1 and 2), pooled OLS (models 1, 2 and 3) and fixed effects (model 1) show that growth was significantly improved by the complementarity variable.Policies geared at enhancing banking sector development and domestic investment should be implemented with urgency by BRICS if they intend to strengthen economic growth.An analysis of the threshold level of the banking sector development required to trigger significant economic growth is a possible empirical study that can add more value to policy making in the context of the BRICS.
GROWTH, BANK, DINVEST, FDI, OPEN, INFR, REMIT, and HCD, respectively, stand for economic growth, banking sector development, foreign direct investment, domestic investment, infrastructural development, trade openness, human capital development, and personal remittances.Equations (2), (3) and (4) are the econometric ones used to estimate the economic growth inspired by the banking sector in BRICS.Difference among the three econometric equations lies in the proxy of the banking sector development used.

Figure 1
Figure 1 presents the results of the banking sector development trends for BRICS during the period from 1987 to 2020.
for the BRICS nations used in this study were obtained from publicly available databases such as World Development Indicators and Reserve Bank of South Africa.

Table 1
presents panel stationarity test results.

Table 2
contains panel cointegration test results.

Table 3
presents fixed effects' results.FMOLS were presented in Table4, whereas Table5contains the pooled OLS results.Model 1 to 3 are distinguished by the proxy of banking sector development used.

Table 2 .
Panel co-integration using the Johansen Fisher approach

Table 5 .
Pooled OLS resultsSource: Author's calculations.Both sets of results are consistent with Haq (2012) who argued that domestic investment is a productive factor that increases the capital formation and enhances the growth of the economy.