Financial innovation and economic growth in Bangladesh

Md Qamruzzaman,Wei Jianguo

doi:10.1186/s40854-017-0070-0

Md Qamruzzaman, Wei Jianguo

Open Access

https://doi.org/10.1186/s40854-017-0070-0

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Abstract

BackgroundThis study provides evidence for the financial innovation in the financial system that resulted in the economic growth of Bangladesh from 1980-2016.MethodsTo capture the influence of financial innovation on economic growth, we estimated the long-run cointegration by applying Autoregressive Distributed Lag (ARDL) bound testing and Granger causality-based Error Correction Model (ECM) to capture the directional association.ResultsThe Test of Cointegration satisfied the existence of a long-run association between economic growth and the financial innovation proxies, which were the Domestic Credit to the Private Sector (DCB) as a percentage of the Gross Domestic Product and the Broad-to-Narrow Money (M2/M1) as a percentage of the Gross Domestic Product. Our results showed that in the long run, credit circulation to the private sector and monetary management play important roles in economic growth. We also found that the coefficients of the financial innovation proxy variables were positive and statistically significant both in the short run and long run. We also ran Granger causality tests to investigate the directional effect. This study confirmed the feedback causality between the economic growth and 2 proxies of financial innovation in the short and long run. The gross capital formation and trade openness contribute significantly to explaining the economic growth in Bangladesh.ConclusionThe government of Bangladesh should encourage financial innovation in the financial system, especially at financial institutions, so that access to financial services can easily provide for equitable development. The government should also encourage financial innovation in the capital market, which will assist in raising long-term capital for investment and expedite overall economic growth.

Highlights

This study provides evidence for the financial innovation in the financial system that resulted in the economic growth of Bangladesh from 19802016
Because, financial innovation reflect as an agent for exploring Financial development through diversification of financial services (Silve and Plekhanov 2014; Bianchi et al 2011; Merton 1992), efficient financial intermediation (Johnson and Kwak 2012), technological advancement (Valverde et al, 2007; Michalopoulos et al 2011), and new channel for efficient resource allocation for productive output (Duasa 2014; Sood and Ranjan 2015), in turn, accelerated sustainable economic growth at large
No variables are integrated at I (2); it is the necessary condition of the nature of such variables that suggest applying the Autoregressive Distributed Lag (ARDL) for further analysis

Summary

Introduction

This study provides evidence for the financial innovation in the financial system that resulted in the economic growth of Bangladesh from 19802016. Qamruzzaman and Jianguo Financial Innovation (2017) 3:19 for financial sector development (Napier 2014; Ndako 2010). It is, because, financial innovation reflect as an agent for exploring Financial development through diversification of financial services (Silve and Plekhanov 2014; Bianchi et al 2011; Merton 1992), efficient financial intermediation (Johnson and Kwak 2012), technological advancement (Valverde et al, 2007; Michalopoulos et al 2011), and new channel for efficient resource allocation for productive output (Duasa 2014; Sood and Ranjan 2015), in turn, accelerated sustainable economic growth at large. The financial sector of Bangladesh comprises with private commercial banks, insurance companies, leasing companies, specialized financial institutions, such as House Building Finance Corporation, financial markets, and informal financial institutions

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Results

Conclusion