Financial Intermediation and Economic Growth in Saudi Arabia: An Empirical Analysis, 1968-2010

PurposeThis study seeks to investigate the impact of financial intermediation on economic growth in Turkey using annual data spanning 1970–2017.Design/methodology/approachBased on the results of the augmented Dickey–Fuller and Phillips–Perron unit root tests for stationarity, the authors employ the Autoregressive Distributed Lag (ARDL) bounds testing to cointegration to establish the long-run impact of financial intermediation alongside other control factors on economic growth. The study also examines the short-run relationship between financial intermediation and economic growth by estimating the Error Correction Model (ECM).FindingsThe authors’ findings indicate that financial intermediation significantly influences economic growth in both short and long run. However, the effect is positive only in the short run, lending support to the supply-leading hypothesis. Regarding the control variables, the authors observe that while financial openness shows a positive significant impact on economic growth in the long run, gross fixed capital formation matters only in the short run. The results further infer that regardless of the time period, inflation impedes economic growth.Originality/valueIn the empirical analysis of the relationship between financial intermediation and economic growth, financial intermediation is always measured using a single variable. The authors argue that such studies could produce bias and misleading results given that a single proxy does not adequately reflect financial intermediation activities. Likewise, such findings may delude policy implementation. To provide a more vivid and robust analysis, the authors employ the Principal Component Analysis (PCA) to construct a composite index for financial intermediation based on three broad measures. The researchers’ are unaware of any study on the financial intermediation–economic growth nexus using a composite index of financial intermediation. Thus, this paper fills this lacuna in the literature.

Publisher Summary This chapter discusses the financial development and economic growth in underdeveloped countries. An observed characteristic of the process of economic development over time, in a market-oriented economy using the price mechanism to allocate resources, is an increase in the number and variety of financial institutions and a substantial rise in the proportion not only of money but also of the total of all financial assets relative to GNP and to tangible wealth. Typical statements indicate that the financial system somehow accommodates—or, to the extent that it malfunctions, it restricts—growth of real per capita output. Such an approach places emphasis on the demand side for financial services; as the economy grows it generates additional and new demands for these services, which bring about a supply response in the growth of the financial system. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.

The pre-eminence of Islamic finance from the perspective of economic growth has been a long-standing debate. In recent decades, there has been a paradigm shift from interest-based banking to Islamic financial system. This study intends to examine the dynamic interaction of Islamic financial depth (IFD), Islamic financial intermediation (IFI), and asset quality with economic growth in a dual banking system. The paper employs autoregressive distributive lag regression (ARDL), error correction model (ECM) and Granger causality to examine the long and short run linkage by using the quarterly data of Pakistan from 2005 to 2019. The authors run two models to analyze the relative importance of financial depths (Islamic and conventional), financial intermediation (Islamic and conventional), and asset quality of both financial systems. A long-run relationship flowing from finance to growth in both Islamic and conventional finance models has been observed in our study. Furthermore, the findings recommend that strong financial intermediation plays an imperative role in driving economic growth by both financial sectors. The presence of a higher degree of Islamic financial assets in the economy contributes towards economic growth in the short-run. The results show that asset quality possibly plays an important intervening role in the overall finance-growth nexus.

It is widely recognized that trade and foreign direct investment (FDI) inflows are important factors in long-term economic growth. Trade openness enhances skills through the adoption of imported superior production technology and innovative processes, and thus exerts a positive and significant impact on economic growth. Similarly, FDI augments and stimulates domestic investment, enhances technology transfer, increases export capacity and foreign exchange earnings, and thus promotes capital formation and long-run growth. This paper examined the empirical relationship between economic growth on one hand and trade and FDI flows on the other hand for Saudi Arabia during the last four decades (1970-2010). The autoregressive distributed lag (ARDL) methods to cointegration and the associated error correction model (ECM) are adopted. The results suggest that human capital, government expenditure, trade openness and infrastructure are important determinants of long run growth in Saudi Arabia. In contrast, FDI together with domestic private investment has impacted negatively on real gross domestic product (GDP). This is attributed partly to the dominant role of the public sector in the economy emanating from the huge oil resources, thereby leaving little room for the domestic and foreign private investment to play their role in the economy, and partly to the concentration of FDI in unproductive sectors. Nonetheless, the interaction of FDI either with government expenditure or with domestic investment could impact positively on growth. Efforts should therefore focus on enhancing the integration between these factors on long-term growth. Privatization, economic liberalization, and diversification measures are expected to provide real opportunities for domestic and foreign investment to play an important role in economic activity and growth. Key words: Saudi Arabia, FDI, unit roots, ARDL cointegration, ECM, trade.

The impact of financial intermediation on the growth of an economy has becomea controversial discuss among researchers with no unanimity. As the activities is said to be germane to economic development process some findings still comes out with it having an undesirable effect on the growth process of the nations studied. To take a stand therefore, this study observed the nexus between financial intermediation and economic growth process in Nigeria using data covering 1985 to 2023. While economic growth was taken as the explained variable other explanatory variables which were confirmed as important, through the various test carried out in the study, were used. After carrying out the unit root test and found to be a blend of first difference and levelssignificancy, analysis was done using an Auto Regressive Distributed Lag (ARDL) estimation technique. From the findings, it was discovered that financial intermediation activities influence economic progress. All the control variables present positive effect on economic growth, though not statistically significant except that of financial openness, with the exception of inflation which encumbers the development of the nation. Premised on this, suggestions weremade to the government to fortify regulatory basis controlling financial services in order to improve stability in the fiscal sector and also legislates practicable policy to keep inflation at bay so as to encourage both local and foreign investors to commit their investable fund to domestic market in other to boost productivity and growth, among others.

Objective: This study examined the impact of financial intermediation on economic growth in Nigeria. The study employed secondary data obtained from the Central Bank of Nigeria statistical bulletin from year 1987 to 2020. Method: The independent variable – Financial intermediation was proxied by credit to private sector, broad money supply, lending rate, market capitalization and total value of shares traded while the dependent variable – Economic growth was proxied by gross domestic product and per capital income. Autoregressive Distributed Lag (ARDL)/Bound testing to co-integration was used to establish the short run and long-run dynamic impact of financial intermediary on economic growth in Nigeria. Results: The study revealed a high speed of adjustment in the short run (Cointeq(-1) = (-0.9995; -0.981099) for the two models respectively. Similarly, for the GDP model, the study revealed that in the long run, credit to private sector (β1 = 0.0121); market capitalization (β4 = 0.05423) and total volume of shares traded (β5 = 1.62669) all established positively significant impact on economic growth in Nigeria at 5% significance level except broad money supply (β2 = - 0.00511) and lending rates (β3 = - 0.14194) which established negatively significant impact on economic growth in Nigeria at 5% significance level. However, for the PCI model, the study revealed that in the long run, credit to private sector (β1 = 0.002216); market capitalization (β4 = 0.095095) and total volume of shares traded (β5 = 1.915620) all established positively significant impact on economic growth in Nigeria at 5% significance level except broad money supply (β2 = -0.008476) and lending rates (β3 = -0.313843) which established negatively significant impact on economic growth in Nigeria at 5% significance level. Conclusion: The study therefore, recommends that management of banks should be encouraged to pursue policies that will deepen the efficient allocation of financial services for economic growth in Nigeria.

This paper assesses financial intermediation in Nigeria and how it has impacted economic growth. The study sourced time series data between 1996 and 2022 from the Central Bank of Nigeria and utilized econometric techniques using Ordinary least square regression, Error correction model, and Pairwise Causality to assess the impact of the financial intermediation institutions on the growth of the nation's Gross Domestic Product. The paper focused on banks, capital markets, and the insurance industry being significant institutions in the financial system. The GDP is the dependent variable, while Credit to the Private Sector as a percentage of GDP (CPS/GDP) and Total Savings as a percentage of GDP (TS/GDP) were used as proxies for assessing banks' contributions to economic growth. Stock market capitalization was used as a proxy for the contribution of the capital market to economic growth, and Insurance industry assets were used as a proxy for the insurance industry's contribution to economic growth. The study revealed no co-integration and long-term relationship between economic growth and the financial intermediation variables. There was, however, a unidirectional causal relationship between economic growth and the banks and the capital markets. There was no causality between economic growth and insurance. We recommend that policymakers undertake periodic reforms to deepen the capacity of the institutions to support de-risking and funding small and medium enterprises and the agricultural value chain, which are vital channels for diversifying the economy. The regulatory authorities are pivotal in upscaling the institutions' contribution to economic development.

This paper explores the relationship between economic growth and financial intermediation in Pakistan. By utilizing data from 1996 to 2022, presence of cointegration in the long run is investigated by employing the auto regressive distributed lag (ARDL) bounds testing approach, whereas error correction model (ECM) is used to depict short run linkages. The augmented dickey fuller (ADF) test verifies the stationarity properties of the series. The results show that financial intermediation promotes economic growth both in short run as well as in long run and confirm the view of Schumpeter regarding finance growth nexus. The findings also reveal that investment and human development also significantly contribute to productivity and economic expansion whereas public expenditure exhibits a positive but insignificant effect due to crowding out effects. The study found that despite improvements in Pakistan's financial structure, sustainable economic growth requires an enabling investment climate and robust governance which can be achieved by implementing suitable reforms for development of a well-organized financial sector.

The relationship between financial intermediation and economic growth has been under investigation for decades. Some studies have been conducted using panels of countries with or without similar characteristics while others have been carried out on individual countries. In less-developed countries, the evidence about the link between financial intermediation and economic growth is particularly deficient. This study attempts to empirically investigate the possible cointegration and causal link between financial intermediation and economic growth in Rwanda, using quarterly data spanning from 1996Q1 to 2010Q4. A Structural Vector Autoregressive model is used to analyse the short-run dynamics between variables of interest. Findings of the study show evidence of a cointegrating relationship between financial intermediation and economic growth in the country. It is further observed that a shock to domestic private sector credit accounts for the largest proportion of fluctuations in real output growth, while the shock to potential liquidity comes second. This supports the supply-leading hypothesis in the intermediation link between financial sector development and economic growth in Rwanda, which suggests that the country can achieve significant economic growth if it reinforces incentives to attract businesses that can easily make use of the present financial services.

This study examined the influence of financial intermediation on Nigeria’s economic growth. Secondary data employed in the study was sourced from the 2021 Statistical Bulletin of the Central Bank of Nigeria. The obtained data were subjected to autoregressive distributed lags (ARDL) models. The study revealed that credit to the private sector has contributed positively to the economic growth. Finally, the study indicated a significant positive relationship between the total volume of shares traded and economic growth in Nigeria. Consequently, the study concluded that financial intermediation plays a pivotal role in influencing economic growth within the country.

The presence of Islamic and conventional banking in the dual financial system of Indonesia equally hold the role as financial intermediator which theoretically banks collect fund from the debitors to be distributed to creditors. However, along with the changing of time there has been a development in the financial industry, when financial deregulation occurs, where the role of providing credit is not only owned by the banks but also other financial institutions. As the result, banks are no longer considered as the center of financial intermediation but could be replaced by other financial instruments. This study aims to reconsider the role of banking as financial intermediation in the monetary transmission mechanism using three methodoligal approaches which are Vector Autoregression and Vector Error Correction Model (VAR-VECM), Error Correction Model (ECM), and Autoregressive Distributed Lag (ARDL). The long-term results of ECM and VECM estimations both show that credit and finacing channel are still relevant to be employed in the monetary transmission mechanism after the development of financial sector and the change of monetary policy, yet only have an impact to economy and do not give effect to inflation. While the result of ARDL estimation indicates that none of the variables affect the monetary policy objectives which means that credit and financing channel are considered to be getting weaker in the monetary transmission mechanism.

Purpose – The financial institutions have a significant contribution to foster economic growth of a country. This study has the intention to investigate the causal relationship between financial development institutions and economic growth in Tanzania. Design/methodology/approach – The study spans from 1989 to 2018. The article uses four proxy of financial development institutions against Gross Domestic Product (GDP) growth (Annual %). Financial proxy of variables of development institutions comprises Broad Money (% of GDP), Domestic credit for private sector (% of GDP), Domestic credit provided by financial sector (% of GDP), and Domestic credit to the private sector by banks (% of GDP). This study uses Autoregressive Distributed Lag (ARDL), Vector Error Correction Model (VECM), and Granger Causality test. Findings – The paper tries to find the cointegration effects and causal relationships between the proxy variables and economic growth in Tanzania. It indicates that the economic growth of Tanzania dominates financial development institutions. Therefore, economic growth in Tanzania leads to the growth of financial sector. The development of financial sector also gives way to rise in overall economic activity. It is a unidirectional relationship through which the proxy variables depend on economic growth in the country. Discussion – Tanzania government should invest more in the financial institutions in order to improve the economic growth in Tanzania..

This paper is on the assessment of financial intermediation and economic growth in Nigeria from 1980 to 2015. Specifically, this study evaluated the impact of financial intermediation and direction of causality between financial intermediation and economic growth in Nigeria from 1980 to 2015. To achieve the objectives, the study employed the unit root test, the Auto Regressive Distributed Lag Model (ARDL) and the Granger Causality test technique. The results of the unit root test showed that the variables are integrated at I~ (0) and I~ (1). The result of the Auto Regressive Distributed Lag Model (ARDL) analysis shows that financial intermediation is a positive and a significant determinant of economic growth in Nigeria. This partly explains why the private sector is indeed a good driver of economic growth. This paper recommends that the government should implement policies that will aid easy access to credit from financial institutions by the people in the society for investment purposes.

Purpose- The aim of the research is to predict the impact of financial globalization, institutional quality and economic growth on financial development in fragile economies. In this paper the panel data consists of Turkey, Brazil, India, South Africa, Indonesia, Argentina, Egypt, Pakistan’s annual data from 1995-2017. Methodology –System GMM dynamic panel data approach has been applied to deal with simultaneity bias and endogeneity bias when the explanatory variable is correlated with the residual disturbance term. The System GMM estimator combines regression in differences with regression in levels to get rid of the individual specific effects and along with it any time invariant regressor. The models are estimated by using one step system GMM estimator in other words Arellano and Bover /Blundell and Bond System Generalized Moments Method.Findings- The results show that economic growth and financial development are positively related. Thanks to financial development interest rates can be determined by market conditions and financial intermediaries can minimize transaction costs and information acquisition costs can be minimized. Empirical findings suggest policy guidelines for developing financial sector by using economic growth as an economic instrument. Conclusion- The paper concludes that economic growth have significant impact on financial development so both financial institutions and financial markets development in fragile countries. For less developed countries, developments in institutions are likely to have far greater direct effects on growth than financial development itself. When the financial system is developed, Institutional improvements can also deliver more growth. Since global standards for institutions such as International Country Risk Guide, Global Government Indicators increase, it seems also developing ountries are aware of the importance of institutional quality on economic growth. The findings suggest that financial development is affected by economic growth, inflation and population in fragile countries.

This paper portrays the impact of financial intermediation especially domestic credit to the private sector and broad money supply on GDP growth in Nepal, using annual time series data spanning from 1974 to 2022. The main objectives of the paper are to examine the magnitude and direction of these financial intermediation variables in influencing economic growth of Nepal. The included time series data were a mix of stationary at level and after first difference. Hence, an Autoregressive Distributed Lag (ARDL) model was employed to provide robust framework for analyzing both long-term relationships and short-term fluctuations while maintaining flexibility in lag selection and handling endogeneity. The findings indicate a nuanced relationship between financial factors and GDP growth of Nepal. Specifically, the coefficient of domestic credit to the private sector is positive but statistically insignificant, this suggests that the flow of domestic credit may be either insufficient or inefficiently allocated to significantly contribute Nepalese economic growth. But, the broad money supply as a percentage of GDP shows a strong positive and statistically significant effect. This indicate that increased money supply supports business activities, improves liquidity, spur investments, and eventually fostering economic growth. Moreover, other control variables also display significant relationships with GDP growth of Nepal. Labor force participation and trade openness demonstrate substantial positive effects, while government expenditure shows a modest positive impact. Furthermore, private consumption expenditure emerged as a critical driver of growth, emphasizing the importance of household expenditure in stimulating demand and economic growth. Therefore, these results underscore the necessity of a stable money supply, increased labor force participation, enhanced private consumption, and greater trade openness for sustained economic growth in Nepal. The findings also shed light to explore potential area for policy improvement to strengthen domestic credit allocation to enhance its contribution to economic growth.