Does Kyrgyz banking system liquidity provide economic growth?

Abstract

The relationship between the liquidity ratio, the economy and the banking system of a country is a popular subject among academics. This research aims to understand this connection for Kyrgyzstan, a developing economy. The Vector Auto Regression approach was used to trace the association of liquidity ratio to loan and deposit volumes, interest income, net interest income, treasury bill volume, and gross domestic product based on the quarterly data. The data was obtained from various publications of the National Bank of the Kyrgyz Republic. The primary literature indicates that bank liquidity has an inverse correlation not only with bank profitability but also with economic growth. The findings confirm a similar relationship for Kyrgyzstan. Furthermore, liquidity has a positive relationship to treasury bills volume, but a negative correlation to economic growth. However, there was no significant correlation between the liquidity ratio and deposit volumes. Therefore, this paper found that high liquidity ratio of the Kyrgyz banking system negatively effects both the profitability of the banks and economic growth.