An Empirical Explanation of the Size of the Development Banking Sector in Developing Countries

Abstract

The study employs annual time-series and panel data that cover 38 LDCs and the periods that fall between 1960 and 1989 in order to examine the factors that determine the depth of development banking and its size viz-a-viz the total banking system. Within the framework of regression equation model, we tested the effects of 5 factors viz: inflation rate, level of economic development, economic growth, size of the public sector, and investment requirements. Our findings suggest that both the inflation rate and economic growth generally have negative effects on each of the development banking depth and the relative size of development banking within the overall banking sector while both the level of economic development and the size of public sector generally exert positive effects on the two development banking variables. On the other hand, while investment requirement generally has a positive effect on the development banking depth, it generally has an opposite negative effect on the relative size of development banking in the total banking system.