Showing papers on "Financial sector development published in 2014"

Foreign banks: Trends and Impact

Abstract: Over the past two decades, foreign banks have become much more important in domestic financial intermediation, heightening the need to understand their behavior. We introduce a new, comprehensive database, made publicly available, on bank ownership (including the home country of foreign banks) for 5,324 banks in 137 countries over the period 1995-2009. We document large increases in foreign bank presence in many countries, but with substantial heterogeneity in terms of host and banks’ home countries, bilateral investment patterns, and bank characteristics. In terms of impact, we document that the relation between private credit and foreign bank presence importantly depends on host country and banks’ characteristics. Specifically, foreign banks only seem to have a negative impact on credit in low-income countries, in countries where they have a limited market share, where enforcing contracts is costly and where credit information is limited available, and when they come from distant home countries. This shows that accounting for heterogeneity, including bilateral ownership, is crucial to better understand the implications of foreign bank ownership.

The linkages among energy consumption, economic growth, relative price, foreign direct investment, and financial development in Malaysia

Abstract: The aim of this study is to analyse the causal relationship among energy consumption, economic growth, relative price, financial development (FD) and foreign direct investment in Malaysia using a multivariate framework. This study covers a sample from 1972 to 2009. Both the Johansen–Juselius cointegration test and bounds testing approach to cointegration consistently suggest that the variables are cointegrated. We find that energy consumption and economic growth Granger causes each other in the short and long run. In addition, both FDI-led growth and finance-led growth hypotheses are also supported by the findings from this study. Ultimately, energy is a prominent resource for financial sector development in Malaysia because we find that energy consumption Granger causes FD. Policymakers should implement a dual strategy that, on one hand, increases investment in energy infrastructure to ensure that the supply of energy is sufficient for the financial sector and economic development, while, on the other, encourages R&D in green technology such as exercising proper soil conservation techniques and sustainable farming practices in order to reduce the consumption of fossil fuels. By doing so, environmental problems such as carbon dioxide emissions can be minimised without affecting economic growth and financial sector development in Malaysia.

The African financial development and financial inclusion gaps

Abstract: This paper investigates the African financial development and financial inclusion gaps relative to other peer developing countries. The paper uses a set of variables related to financial development and inclusion. It first estimates the gaps between African countries and other developing countries with similar degrees of economic development. Then, it explores the determinants of financial development and inclusion. The analysis finds that population density is considerably more important for financial development and inclusion in Africa than elsewhere. Finally, the paper shows evidence that a recent innovation in financial services, mobile banking, has helped to overcome infrastructural problems and improve financial access.

Does Islamic finance spur banking sector development

Abstract: Islamic finance is one of the most prominent phenomena over the last decade in the banking industry in the Middle-East and South-East Asia. In spite of the substantial size and growth of this segment recently, the role of Islamic banking in the economy is still heavily debated and very few empirical work is available. This paper studies the empirical impact of Islamic banking on banking sector development. It circumvents the lack of data through a newly constructed and comprehensive database, “IFIRST”, covering Islamic commercial banks worldwide over the period 2000–2005. This database is, to our knowledge, unique in the industry. We find strong and consistent empirical evidence that the development of Islamic banking in Muslim countries leads to a higher banking sector development, as measured by the amount of private credit or bank deposits scaled to GDP. This effect occurs through the development of a new, Shariah-compliant, banking industry, which does not crowd out the conventional banking system. Additionally, we provide evidence that the Islamic banking sector acts as a complement to the conventional banking in Muslim countries, when both systems co-exist and the Islamic sector reaches a medium penetration in the total banking sector.

Financial inclusion and development : recent impact evidence

Abstract: This focus note is organized in three sections. The first section describes the extent to which poor households typically live and work in the informal economy and explores the implications of this for how access and use of financial services can benefit them. The second section summarizes recent empirical impact evidence at the microeconomic, local economy, and macroeconomic levels. The third section tees up two areas in which inclusive, low-cost financial systems can generate additional, indirect benefits for other public-sector and private-sector efforts.

Disasters and development: natural disasters, credit constraints, and economic growth

Abstract: We demonstrate, using a simple two-period equilibrium model of the economy, the potential effects of extreme event occurrences - such as natural or humanitarian disasters - on economic growth over the medium- to long-term. In particular, we focus on the effect of such shocks on investment. We examine two polar cases; an economy in which agents have unconstrained access to capital markets, versus a credit-constrained version, where the economy is assumed to operate in financial autarky. Considering these extreme cases allows us to highlight the interaction of disasters and economic underdevelopment, manifested through poorly developed financial markets. The theoretical analysis shows that the shock of a disaster occurrence could have lasting effects on economic growth only if agents face borrowing constraints. The predictions of our theoretical model are then tested using a panel of data on natural disaster events at the country-year level, covering the period 1979-2007. We find that for countries with low levels of financial sector development, natural disaster events exert a significant negative impact on economic growth. In particular, where access to credit is problematic, the negative effects of disasters on growth are persistent over the medium- term. These results are robust to various checks. Our findings suggest that natural disasters do represent significant threats to economic development in poor countries.

Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed?

Abstract: This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect Using interaction models, we find the effect of the VIX to be non-linear For low levels of the VIX, capital flows are driven by fundamental factors During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance Our results also suggest that the effect of global financial conditions on gross private capital flows increases with the host country’s level of financial sector development Finally, our results imply that countries cannot fully insulate themselves from global financial shocks, unless creating a fragmented global financial system

Revisiting the Internationalization of the Yuan

Abstract: As the world’s second largest economy, largest trading nation, and the largest foreign holder of United States (US) government bonds, the People’s Republic of China (PRC) needs a currency with international status that can match its economic status in the global economy However, sequencing is important Before the internationalization of the yuan can make meaningful progress, necessary conditions, such as the existence of deep and liquid financial markets, a flexible exchange rate and interest rates responsive to market conditions must be created

Financial Sector Development and Economic Growth in Nigeria: An Empirical Investigation

Abstract: The study examines the relationship between Financial Sector Development and Economic Growth in Nigeria. Time series data from 1990-2009 were fitted into the regression equation using various econometric techniques such as Augmented Dickey Fuller (ADF) test, Johansen Multivariate Co-integration Test, Ordinary Least Square Regression and Vector Error Correction Model (VEC). The result shows that development in financial sector variables viz: banking sector credits, total market capitalization and foreign direct investment positively affect economic growth variables - Real Gross Domestic Product. This result is consistent with a number of earlier studies reviewed in the literature that found financial sector variables to positively affect real gross domestic product.

Housing finance across countries : new data and analysis

Abstract: This paper presents new data on the depth and penetration of mortgage markets across countries. There is a large variation across both dimensions of mortgage market development, across countries, but also -- in terms of depth -- within countries. Mortgage markets seem to develop only at relatively high levels of gross domestic product per capita. Policies associated with financial system development are also associated with mortgage market development, including price stability and the efficiency of contractual and information frameworks. The development of the insurance sector and the stock market, sources of long-term funding, is strongly associated with mortgage market development, while government subsidies and support are not. A benchmarking exercise compares the actual values of mortgage market development to values predicted by structural country factors and shows a large variation across countries and over time in the gap between predicted and actual values, related to specific policies but also mortgage boom and bust cycles.

New firm registration and the business cycle

Abstract: This paper uses new panel data on the number of new firm registrations in 109 countries during 2002-2012 to study the relationship between entrepreneurship and economic growth. The data show strong evidence of a pro-cyclical pattern in entrepreneurship. An examination of heterogeneous relationships between new firm registration and the business cycle finds that higher levels of financial development and better business environments are associated with stronger pro-cyclicality of entrepreneurship both across countries and within countries over time. The results are robust to various measures of business regulation, such as the cost and time of starting a new firm and closing an insolvent firm. These findings suggest that fostering an efficient regulatory environment for the financial and private sector is important for encouraging a speedier recovery in the formation of new firms during economic expansions and aiding the efficient wind-down of insolvent firms during economic slowdowns.

Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed?

Abstract: This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade. It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect. Using interaction models, we find the effect of the VIX to be non-linear. For low levels of the VIX, capital flows are driven by fundamental factors. During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance. Our results also suggest that the effect of global financial conditions on gross private capital flows increases with the host country’s level of financial sector development. Finally, our results imply that countries cannot fully insulate themselves from global financial shocks, unless creating a fragmented global financial system.

International Remittances and Financial Inclusion in Sub-Saharan Africa

Abstract: This paper uses World Bank survey data, including about 10,000 households in five countries -- Burkina Faso, Kenya, Nigeria, Senegal, and Uganda -- to investigate the link between international remittances and households' financial inclusion in Sub-Saharan Africa. The paper finds that receiving international remittances increases the probability that the household opens a bank account in all the five countries. This result is robust to controlling for the potential endogeneity of remittances, using as instruments indicators of the migrants' economic conditions in the destination countries.

Financial development in Asia : beyond aggregate indicators

Abstract: This paper documents the major trends in financial development in Asia since the early 1990s and the spillovers to firms. It compares Asia with advanced and emerging countries and uses both aggregate and disaggregate indicators. Financial systems in Asia remain less developed than in advanced countries but more developed than in Eastern Europe and Latin America. Bond and stock markets play a larger role and institutional investors have gained importance. Nonetheless, capital-raising activity has not expanded. A few large companies capture most of the issuances. Many secondary markets remain illiquid. The public sector captures a significant share of bond markets. The largest advancements in Asia occurred in China and India. But still in these countries, few large companies use capital markets to expand and grow, becoming much larger than nonuser firms. In sum, Asia's financial systems remain less developed than aggregate measures suggest, with few spillovers to many firms.

Informal firms and financial inclusion : status and determinants

Abstract: Many firms in the developing world -- including a majority of micro, small, and medium enterprises -- operate in the informal economy. The informal firms face a variety of constraints, making it harder for them to do business and grow. Lack of access to finance is often cited as the biggest operational constraint these firms face. This paper documents the use of finance and financing patterns of informal firms, highlights differences between use of finance by formal and informal firms, and identifies the most significant characteristics of informal firms that are associated with higher use of financial services. The analysis shows that use of loans and bank accounts for business by informal firms is very low and a vast majority finances their day-to-day operations and investments through sources other than financial institutions (internal funds, moneylenders, family, and friends). A majority of informal firm owners would like their firms to become formal but do not do so as it would require them to pay taxes. Registered firms are 54 percent more likely to have a bank account and 32 percent more likely to have loans. Results also show that firm size, the level of education of the owner, and whether the owner has a job in the formal sector are significantly associated with financial inclusion of informal firms.

Hometown investment trust funds: An analysis of credit risk

Abstract: In Asia, small and medium-sized enterprises (SMEs) account for a major share of employment and dominate the economy. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital markets. Hence, looking for new methods of financing for SMEs is crucial. Hometown investment trust funds (HIT) are a new form of financial intermediation that has now been adopted as a national strategy in Japan. In this paper, we explain the importance of SMEs in Asia and describe about HITs. We then provide a scheme for the credit rating of SMEs by employing two statistical analysis techniques, principal components analysis and cluster analysis, and applying various financial variables to 1,363 SMEs in Asia. Adoption of this comprehensive and efficient method would enable banks to group SME customers based on financial health, adjust interest rates on loans, and set lending ceilings for each group. Moreover, this method is applicable to HITs around the world.

The impact of funding models and foreign bank ownership on bank credit growth : is Central and Eastern Europe different ?

Abstract: This paper provides new evidence on the factors affecting protracted credit contraction in the wake of the global financial crisis. The paper applies panel vector autoregressions to a global panel that consists of quarterly data for 41 countries for the period 2000-2011 and documents that domestic private credit growth is highly sensitive to cross-border funding shocks around the world. This relationship is significantly stronger in Central and Eastern Europe, a region with considerably stronger foreign presence, higher cross-border funding, and elevated loan-to-deposit ratios compared with the rest of the world. The paper shows that high foreign ownership per se does not appear to explain credit response differences to foreign funding shocks. Rather, there is a stronger response in countries that exhibit high loan-to-deposit ratios and a high reliance on foreign funding relative to local deposits. The results suggest that funding model differences were at the heart of the post-crisis credit contraction in several Central and Eastern European countries. These findings have important regulatory and supervisory implications for emerging countries in Central and Eastern Europe as well as for other countries.

Does Openness Matter for Financial Development in Africa

Abstract: This paper analyzes the links between financial and trade openness and financial development in Sub-Saharan African (SSA) countries It is based on a panel dataset using methods that tackle slope heterogeneity, cross-sectional dependence and non-stationarity, important econometric problems that are often ignored in the literature The results do not point to a general direct robust link between trade and capital account openness and financial development in SSA, once we control for other factors such as GDP per capita and inflation But there is some indication that trade openness is more important for financial development in countries with better institutional quality The findings might be due to a number of factors including distortions in domestic financial markets, relatively weak institutions and/or poor financial sector supervision Thus, African policy makers should be cautious about expectations regarding immediate gains for financial development from greater international integration Such gains are more likely to occur through indirect channels

An Empirical Assessment of Financial Sector Development and Economic Growth in Nigeria

Abstract: The objective of this paper has been is to examine empirically, the implications of financial development for economic growth in Nigeria. Time series data covering the period between 1990 and 2011 from Nigeria. The cointegration technique with its implied Error Correction Mechanism (ECM) was applied. This commenced with the ADF unit root test, followed by the Johansen cointegration test. The Overparameterize and Parsimonious ECM was next and this was followed by the Vector Error Correction, diagnostic tests and Cholesky variance decomposition. The variables included Real Gross Domestic Product, Financial deepening which is a ratio of money supply to Gross Domestic Product, liquidity ratio, interest rate and credit to the private sector. Financial sector development has not significantly improved private sector development. The minimum capital base and liquidity ratio has improved the level of economic growth in Nigeria. The Johansen cointegration test suggests a long run relationship among the variables and the significant ECM which is negatively signed supports the long run relation among the variables and indicates a satisfactory speed of adjustment. Although financial sector development has on the aggregate significantly improved the level of economic performance, the credit to the private sector did not play significant role. The result recommends, amongst others, that further development of the financial sector should be oriented towards the development of the private sector.

The Relationship between Financial Development and Economic Growth in Africa

Abstract: This study examines the relationship between financial development and economic growth. It presents evidence on a cross section of 50 African countries whose data is available for the period 1980-2008. Two proxies of financial development are employed: the ratio of credit to the private sector to total GDP and the ratio of broad money (M2) to total GDP. We establish a positive relationship between financial development and economic growth. However, we find that the relationship between private sector credit and economic growth is much stronger than the relationship between money supply and economic growth. In addition, we find that the relationship between financial sector development and economic growth is bi-directional. The results suggest that both the financial sector and the real sector are important in influencing Africa’s current and future growth trajectory.

The quality of institutions and financial development in mena countries: an empirical investigation

Abstract: This paper provides new evidence that sheds light on the influence of institutional quality on financial development using data from Middle East and North African (MENA) countries over the period of 1984-2007. To measure institutional quality we construct a yearly composite index (INST) using the International Country Risk Guide’s (ICRG). The results of both panel data and IV techniques of estimation show that the institutional quality is more relevant for banking sector than for stock market development. Examining the impact of five sub-indicators of the composite ICRG index on financial sector development, we find that some institutional aspects matter more than others do. While law and order are the most relevant determinant of banking sector development, corruption and investment profile are of secondary importance for banking sector development. We also find that, investment profile is the most relevant determinant of stock market development. It has a positive significant effect on market index and stock market liquidity.

Financial sector policy in practice : benchmarking financial sector strategies around the world

Abstract: Policy makers use financial sector strategies to formulate a holistic policy for their national financial sectors This paper examines and rates financial sector strategies around the world based on how well they formulate development targets, arrangements for systemic risk management, and implementation plans The strategies are also rated on whether they consider policy trade-offs between financial development and systemic risk management The rated strategies are then benchmarked against a wide range of country characteristics The analysis finds that the scope and quality of national strategies for the financial sector are influenced by the country's type of legal system, its level of income and macroeconomic stability, the existing financial depth and inclusion, the share of foreign ownership in the national financial sector, and the experience of past financial crises Giving due consideration to policy trade-offs, particularly between financial development and systemic risk management, remains the weakest part of these strategies Countries with civil- and religious-based law and those with a higher share of foreign ownership in their financial system address the policy trade-offs more often

Financial Development and Economic Growth in Emerging Asian Countries

Abstract: Many countries removed constraints on goods, services and capital gradually after fall of Bretton Woods system and globalization of financial markets accelerated especially as of 1980s. This process contributed to the development of financial sectors in many countries. Therefore many studies have been conducted about the possible effects of financial sector on major macroeconomic variables in recent years. This study investigates the possible effects of financial sector development on economic growth in emerging Asian countries during the period 1992-2011 by panel regression. We found that various indicators representing the development of banking sector and stock market had positive effect on economic growth in emerging Asian countries.

Financial Deepening and Economic Growth in Gulf Cooperation Council Countries

Abstract: The goal of this study is to investigate the causal relationship between financial development and economic growth in Gulf Cooperation Council (GCC) countries, i.e. Bahrain, Oman, Kuwait, Qatar, United Arab Emirates and Saudi Arabia, over the period 1980–2012. We employ panel unit root tests, and Error Correction Model and cointegration techniques to detect long-run and short-run causalities between the variables used in our study. The overall empirical results reveal that the financial sector development contributes significantly to economic growth in the GCC countries. Our results could be of great interest for policymakers since the financial sector could play a crucial role in lowering the dependency of the governments to oil revenues and could contribute significantly to spur economic growth.

Pakistan development update

Abstract: The Pakistani economy faced four major domestic shocks as of April 2015: (i) a political sit-in by opposition parties in Islamabad that lasted between August and December and raised significant political uncertainty; (ii) the September floods in Punjab that affected agricultural crops; (iii) the postponed sale of Oil and Gas Development Company Limited (OGDCL) equity shares in November that reduced its expected privatization proceeds and foreign direct inflows (FDI); and (iv) the terrorist attack in a school in Peshawar that heightened security concerns. However, supported by a favorable slump in international oil prices, and steady implementation of structural reforms by the government, the economy is improving. Preliminary data for the first half of FY15 show growth picking up, driven mainly by strong performance in the agriculture and services sectors. Despite the floods last year, growth improved in the cotton, wheat, and rice crops. The services sector was boosted by transport, storage, communications, finance, and insurance. On the demand side, growth continues to be driven by private consumption partly fuelled by high remittance inflows. Credit to the private sector continued to grow, but slightly less rapidly than last year: as a percentage of GDP, it fell to 13.4 percent in January 2015 compared with 14.1 percent in January 2014. Pakistan is on track to meet a fiscal deficit target of 4.8 percent of GDP in FY15. The newly elected government appears to be committed to fiscal discipline and has made fiscal consolidation the cornerstone of its economic program supported by the IMF, the World Bank and other donors. At present, Pakistan is facing three sources of risk: first is the prospect of an early reversal of the fall in oil prices. Second is the repeat of political events of the first half that keep FDI flows and private investment low; and also affects foreign reserves, privatization program and growth prospects. An uncertain political environment undermines investor confidence and depresses economic activity. Third is the continuation of a troubled domestic energy sector that continues to endure a long-due complex inheritance on its circular debt. Given past trends and the current growth rate, poverty is expected to continue to fall and shared prosperity to improve in this and the next fiscal year. However, a large mass of the population is clustered around the official poverty line, so that small improvements in household real consumption can translate into substantial movement in poverty in either direction.

CASE STUDY: Role of remittances in Tongan economy

Abstract: Inward remittances have been a great support to Pacific Island Countries, including Tonga. Aside from being a major source of foreign exchange earnings, they supplement domestic savings and real resources. This paper examines the role of remittances in the economic growth of Tonga’s during a 28 year period (1981-2007).

Contribution of microfinance to economic growth: Transmission channel and the ways to test it

Abstract: Since its birth in 1970s microfinance has been growing rapidly with the aim to lift people out of poverty and promote economic growth. Its role and importance has been amplified amidst the global financial crisis when trust into formal banking is shaken. Despite global recognition and popularity of microfinance there is mixed evidence of its net benefits and very limited work on its contribution to financial intermediation and economic growth. This paper first, identifies and discusses possible transmission channels for microfinance and second, establishes the choice of appropriate methodology for robust empirical test. Adapted for panel data the Arellano-Bond (1991) technique allows for the Granger-Causality type test to reveal the direction of causality and overcome endogeneity issue. The main purpose of the estimation is to check whether microfinance matters - matters for financial sector development and economic growth.