Determinants of banking sector development in developing and emerging economies: Unveiling the role of economic growth, trade openness, and financial liberalization
-
DOIhttp://dx.doi.org/10.21511/bbs.18(3).2023.15
-
Article InfoVolume 18 2023, Issue #3, pp. 177-191
- Cited by
- 269 Views
-
101 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The determinants of financial development in developing and emerging economies are examined in this article. The long-term relationships between banking sector development, financial integration, trade openness, and economic growth are explored using FMOLS-DOLS panel estimations spanning from 1980 to 2021. The critical significance of economic growth, trade openness, and financial liberalization as fundamental drivers of banking system progress is underscored by the results. To investigate this relationship, two specifications are introduced to measure banking sector development: private credits (specification 1) and the ME ratio (specification 2), which is defined as the ratio of M3 to GDP. In the context of specification 1, quantitative outcomes reveal that a 1% increase in economic growth results in a substantial rise of 0.207% in banking sector development according to FMOLS, and 0.972% according to DOLS. Similarly, a 1% increase in trade openness has a noteworthy positive impact of 0.019% on banking development. Furthermore, the results indicate that financial liberalization contributes positively to banking sector development, with an effect of 0.002%. In the context of specification 2, the impact of economic growth is more pronounced, with a significant increase of 0.3187% (FMOLS) and 0.852% (DOLS). However, trade openness (TRADE_OP) manifests a negative impact of –0.392% (FMOLS) and a positive impact of 0.0162% (DOLS). In conclusion, the critical importance of economic growth, trade openness, and financial liberalization in the development of the banking sector in developing and emerging economies is underscored by the empirical evidence. Prudent economic and financial policies, along with strengthened regulation and supervision, are recommended to foster sustainable and resilient financial development in these contexts.
- Keywords
-
JEL Classification (Paper profile tab)G21, G28
-
References55
-
Tables8
-
Figures0
-
- Table 1. A review of the literature on the link between financial development, opening policies, and economic policy
- Table 2. Unit root test in Panel A
- Table 3. Unit root test in Panel B
- Table 4. Descriptive statistics of variables, Panel A
- Table 5. Descriptive statistics of variables, Panel B
- Table 6. Cointegration tests (KAO)
- Table 7. Panel A – Long-run elasticity
- Table 8. Panel B – Long-run elasticity
-
- Adu, G., Marbuah, G., & Mensah, J. T. (2013). Financial development and economic growth in Ghana: Does the measure of financial development matter? Review of Development Finance, 3(4), 192-203.
- Aluko, O. A., & Opoku, E. E. O. (2022). The financial development impact of financial globalization revisited: A focus on OECD countries. International Economics, 169, 13-29.
- Ashraf, B. N. (2018). Do trade and financial openness matter for financial development? Bank-level evidence from emerging market economies. Research in International Business and Finance, 44, 434-458.
- Ashraf, B. N., Qian, N., & Shen, Y. V. (2021). The impact of trade and financial openness on bank loan pricing: Evidence from emerging economies. Emerging Markets Review, 47, 100793.
- Bahajji, S. (2023). Growth, diversification and export earnings instability: What relationship? International Journal of Accounting, Finance, Auditing, Management and Economics, 4(1-1), 82-101.
- Baltagi, B. H., Demetriades, P. O., & Law, S. H. (2009). Financial development and openness: Evidence from panel data. Journal of Development Economics, 89(2), 285-296.
- Bandura, W. N. (2022). Financial openness, trade openness and financial development: Evidence from sub-Saharan Africa. Development Southern Africa, 39(6), 947-959.
- Beck, T. (2002). Financial development and international trade: Is there a link. Journal of International Economics, 57(1), 107-131.
- Bui, T. D., & Bui, H. T. M. (2020). Threshold effect of economic openness on bank risk-taking: Evidence from emerging markets. Economic Modelling, 91, 790-803.
- Caporale, G. M., Sova, A. D., & Sova, R. (2022). The direct and indirect effects of financial development on international trade: Evidence from the CEEC-6. Journal of International Financial Markets, Institutions and Money, 78, 101550.
- D’Onofrio, A., & Rousseau, P. L. (2017). Financial development, trade openness and growth during the first wave of globalization. Financial Economics Review, 127(3), 135-146.
- Ductor, L., & Grechyna, D. (2015). Financial development, real sector, and economic growth. International Review of Economics & Finance, 37, 393-405.
- Fu, J., Liu, Y., Chen, R., Yu, X., & Tang, W. (2020). Trade openness, internet finance development and banking sector development in China. Economic Modelling, 91, 670-678.
- Guariglia, A., & Poncet, S. (2008). Could financial distortions be no impediment to economic growth after all? Evidence from China. Journal of Comparative Economics, 36(4), 633-657.
- Hervé, D. B. G. (2021). Governance, Financial Development and Economic Growth in the WAEMU area: Evidence from panel ARDL analysis. Journal of Applied Finance and Banking, 11(5), 1-27.
- Ibrahim, M., & Sare, Y. A. (2018). Determinants of financial development in Africa: How robust is the interactive effect of trade openness and human capital? Economic Analysis and Policy, 60, 18-26.
- Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53-74.
- Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1-44.
- Kao, C., & Chiang, M. H. (2001). On the estimation and inference of a cointegrated regression in panel data. In B. H. Baltagi, T. B. Fomby, and R. Carter Hill (Ed.), Nonstationary panels, panel cointegration, and dynamic panels (pp. 179-222). Emerald Group Publishing Limited.
- Kao, C., Chiang, M. H., & Chen, B. (1999). International R&D spillovers: an application of estimation and inference in panel cointegration. Oxford Bulletin of Economics and Statistics, 61(S1), 691-709.
- Khan, A., Hassan, M. K., Paltrinieri, A., & Bahoo, S. (2021). Trade, financial openness and dual banking economies: Evidence from GCC Region. Journal of Multinational Financial Management, 62, 100693.
- Kim, D. H., Lin, S. C., & Suen, Y. B. (2011). Interactions between financial development and trade openness. Scottish Journal of Political Economy, 58(4), 567-588.
- Klomp, J., & De Haan, J. (2014). Bank regulation, the quality of institutions, and banking risk in emerging and developing countries: an empirical analysis. Emerging Markets Finance and Trade, 50(6), 19-40.
- Kong, Q., Peng, D., Ni, Y., Jiang, X., & Wang, Z. (2021). Trade openness and economic growth quality of China: Empirical analysis using ARDL model. Finance Research Letters, 38, 101488.
- Lemaallem, H., & Outtaj, B. (2023). Impact of trade and financial openness on economic growth: Which dynamics are there in the short and long run? Revue AME, 5(1), 375-396.
- Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.
- Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. The American Economic Review, 88(3), 537-558.
- Lyu, C., Xiao, Z., & Pu, Y. (2023). Financial openness and firm exports: Evidence from Foreign-owned Banks in China. International Review of Financial Analysis, 87, 102614.
- McCoskey, S., & Kao, C. (1998). A residual-based test of the null of cointegration in panel data. Econometric Reviews, 17(1), 57-84.
- Murthy, D. S., & Samantaraya, A. (2014). Assessing financial development in India and its relation with economic growth: An empirical analysis. Journal of Economic and Financial Modelling, 2(1), 1-12.
- Murthy, D. S., Patra, S. K., & Samantaraya, A. (2014). Trade openness, financial development index and economic growth: Evidence from India (1971–2012). Journal of Financial Economic Policy, 6(4), 362-375.
- Nguyen, H. M., Le, Q. T. T., Ho, C. M., Nguyen, T. C., & Vo, D. H. (2022). Does financial development matter for economic growth in the emerging markets? Borsa Istanbul Review, 22(4), 688-698.
- Oroud, Y., Almahadin, H. A., Alkhazaleh, M., & Shneikat, B. (2023). Evidence from an emerging market economy on the dynamic connection between financial development and economic growth. Research in Globalization, 6, 100124.
- Ouahmane, E., & Guati, R. (2023). The impact of the banking system on Moroccan economic growth: a VAR model approach over the period 2007–2021. Revue AME, 5(2), 301-315.
- Ouedraogo, S., & Sawadogo, H. (2022). Financial development, financial structure and economic growth in the Sub-Saharan African countries. International Journal of Finance & Economics, 27(3), 3139-3162.
- Pan, X., Uddin, M. K., Han, C., & Pan, X. (2019). Dynamics of financial development, trade openness, technological innovation and energy intensity: Evidence from Bangladesh. Energy, 171, 456-464.
- Pedroni, P. (2001). Purchasing power parity tests in cointegrated panels. Review of Economics and statistics, 83(4), 727-731.
- Phillips, P. C., & Hansen, B. E. (1990). Statistical inference in instrumental variables regression with I (1) processes. The Review of Economic Studies, 57(1), 99-125.
- Phillips, P. C., & Moon, H. R. (1999). Linear regression limit theory for nonstationary panel data. Econometrica, 67(5), 1057-1111.
- Qamruzzaman, M., & Jianguo, W. (2020). The asymmetric relationship between financial development, trade openness, foreign capital flows, and renewable energy consumption: Fresh evidence from panel NARDL investigation. Renewable Energy, 159, 827-842.
- Rahman, M. M., Rahman, M. M., Rahman, M., & Masud, M. A. K. (2021). The impact of trade openness on the cost of financial intermediation and bank performance: evidence from BRICS countries. International Journal of Emerging Markets, ahead-of-print.
- Rajan, R. G., & Zingales, L. (2003). The great reversals: the politics of financial development in the twentieth century. Journal of Financial Economics, 69(1), 5-50.
- Redmond, T., & Nasir, M. A. (2020). Role of natural resource abundance, international trade and financial development in the economic development of selected countries. Resources Policy, 66, 101591.
- Sarwar, A., Khan, M. A., Sarwar, Z., & Khan, W. (2021). Financial development, human capital and its impact on economic growth of emerging countries. Asian Journal of Economics and Banking, 5(1), 86-100.
- Sehgal, S., Ahmad, W., & Deisting, F. (2013). A re-assessment of the role of the financial sector in driving economic growth: Recent evidence from cross country data. International Journal of Economics and Finance, 5(1), 133.
- Sehrawat, M., & Giri, A. K. (2016). The impact of financial development on economic growth: Evidence from SAARC countries. International Journal of Emerging Markets, 11(4), 569-583.
- Shabir, M., Jiang, P., Hashmi, S. H., & Bakhsh, S. (2022). Non- linear nexus between economic policy uncertainty and bank lending. International Review of Economics & Finance, 79, 657-679.
- Shafiei, A., Nonejad, M., Zare, H., & Haghighat, A. (2023). The Effect of Financial Development on Human Development in Selected Development Countries Using GMM Method. Journal of System Management (JSM), 9(2), 183-195.
- Singh, S., Arya, V., Yadav, M. P., & Power, G. J. (2023). Does financial development improve economic growth? The role of asymmetrical relationships. Global Finance Journal, 56, 100831.
- Tongurai, J., & Vithessonthi, C. (2023). Financial Openness and Financial Market Development. Journal of Multinational Financial Management, 67, 100782.
- Uddin, S. G., Sjo, B., & Shahbaz, M. (2013). The casual nexus between financial development and economic growth in Kenya. Economic Modelling, 35(1), 701-707.
- Usman, M., Makhdum, M. S. A., & Kousar, R. (2021). Does financial inclusion, renewable and non-renewable energy utilization accelerate ecological footprints and economic growth? Fresh evidence from 15 highest emitting countries. Sustainable Cities and Society, 65, 102590.
- Wajda-Lichy, M., Kawa, P., Fijorek, K., & Denkowska, S. (2020). Trade openness and financial development in the new EU member States: Evidence from a granger panel bootstrap causality test. Eastern European Economics, 58(3), 242-263.
- Yahyaoui, A., & Rahmani, A. (2009). Financial development and economic growth: role of the quality of institutions. Panoeconomicus, 3, 327-357.
- Yuan, S., Wu, Z., & Liu, L. (2022). The effects of financial openness and financial efficiency on Chinese macroeconomic volatilities. The North American Journal of Economics and Finance, 63, 101819.