Islamic Financial Depth, Financial Intermediation, and Sustainable Economic Growth: ARDL Approach

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.

This article presents the synthesis of research activities on the evaluation methodology of the financial system, including its components through the lens of the objective of ensuring sustainable economic growth. The objectives pursued in the evaluation process, the system of indicators and the necessary arguments are formulated. The authors evaluate the financial system in Israel and the Republic of Moldova, including whether its are market-oriented and sufficiently open, efficient and solid; if high standards of transparency, trust and integrity are met. Next, the relationship between the financial system and economic growth in a small open economy of Israel and the Republic of Moldova is empirically examined. The analysis is carried out using two indicators to measure the level of financial development. The first indicator is the financial depth or size of the financial intermediaries sector, measured by the monetization ratio (M2/GDP). The second indicator is the ratio of credit granted to the private sector by commercial banks as a percentage of GDP (financial intermediation ratio).

This paper investigates the relationship between financial development and economic growth in 12 East African countries (Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Rwanda, Seychelles, Sudan, Tanzania, and Uganda) for the period 1981-2007. The dynamic panel generalized method of moments (GMM) estimation is employed to test whether financial sector development has a positive impact in economic growth of East Africa. Theresults show that each of 2 financial development measures (domestic credit provided to the private sector and liquid liability) has a positive impact on economic growth and is statistically significant at the 5% level. These results provide additional evidence to the literature. The findings suggest that governments in East Africa can spur long run and sustainable economic growth by developing their financial sectors. Therefore, policies aimed at improving financial development and intermediation should be promoted.

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.

Long-term sustainable economic growth is manifested in high rates of physical and human capital accumulation. It de- pends on the ability of the economy to mobilize financial resources, and to ensure access by people to these productive assets, which should be invested more efficiently. This process summarizes the role that financial institutions have played in financial intermediation and growth, namely to mobilize savings and allocate them to the most productive and growth-promoting activities. The core argument is that greater financial intermediation gives rise to higher productivity and thus higher national and/or per capita income. This paper examined the empirical relationship between economic growth and financial intermediation for Saudi Arabia during the last four decades (1968-2010). To this end, we adopt the autoregressive distributed lag (ARDL) methods to cointegration and the associated error correction model (ECM). Despite the minimal restrictions imposed on the functioning of the domestic financial system with a view to “fighting terrorism”, the results overwhelmingly indicate that financial intermediation has impacted negatively on long-run real GDP. These findings are attributed to two sets of factors relating to the dominance of economic activities by the public sector and the characteristics of the institutional environment surrounding the private sector, as well as to some func- tional and structural characteristics of the financial system that have impeded its 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.

Presents a model that is suitable for evaluating not only the total effects of financial intermediation on economic growth, but also the channels through which the effects are brought about. These two channels are: the externality of financial on the real sector and the inter‐sectoral differential between financial and real sectors in the productivity of factors of production. Also presented is the conventional and ratherad hocmodel for evaluating the effect of financial intermediation on economic growth. All the models were estimated with cross‐sectional data over the 1970s and 1980s for 90 developing countries and the main findings are that: financial intermediation exerts positive effects on economic growth in developing countries; the two postulated channels of the effects of financial intermediation are both relevant in developing countries; and financial depth, defined as the ratio of financial aggregates to GDP, promotes economic growth in only low‐income developing countries while it has no effect in high‐income ones.

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.

Islamic modes of finance become new phenomenon in financial system. Islamic modes of finance are designed to facilitate financing by the principles in Islamic Sharia, such as mudarabah, musharaka and sukuk. In addition financial intermediation is an important indicator of economic development as well as economic growth.The objective of this study is to determine the relationship between Islamic modes of finance and Islamic financial intermediation by using case study of Malaysia, Indonesia and Jordan. This study employed fixed effect and random effect through time series data from 2001-2010 for both Malaysia and Indonesia. Liquid liabilities, private sector credit and Islamic modes of finance such as mudarabah, musharakah, murabaha, istisna,ijarah used as independent variables that expected to be influence Islamic financial intermediation as well as economic growth. Findings show that Islamic mode of finance which include murabaha, musharakah, mudarabah, istisna, ijarah. While, private sector credit as well as liquid liabilities are not affect Islamic financial intermediation.

Generalized empirical evidences about impact and direction of causality between financial development and economic growth ignoring the differences of structure and other factors seem less effective to understand the contributions of financial as well as real sector development to economic growth by country specific factors in Nepal. This paper has established the short run or long run relationship and the direction of causality between financial and real sector development with economic growth. For the study purpose, time-series data covering the period of 1975 to 2015 were used considering whole financial system in Nepal as population and financial intermediation as sample for the study. E-Views 9 was used to obtain the results of Unit root test, Engle-Granger co-integration test, Error correction model and Granger causality test. Results conclude that although finance-led growth yields positive consequences, real sectors indicator like consumer price index (CPI) has more impact on real gross domestic product (GDP), a proxy of economic growth, than financial development indicators (M2Y, CPY) in Nepal. This study also predicts negative co-integrating relationship between trade openness and GDP.Bidirectional causality between broad money to GDP ratio and real GDP, and unidirectional causality of PIY and CPI with positive role upon GDP suggesting urgent need of contractionary fiscal and monetary policies to induce private sector investment in GDP.

A study of the impact of military expenditures on economic growth and development examines the differences in the results of previous studies which led to contradictory conclusions. The authors find that these differences are due to sample variations, specificational choices, and the different time periods examined. The data indicate that there is no consistent, statistically significant connection between military spending and economic growth. Augmentation of the models suggests that military expenditures neither help nor hurt economic growth to any significant extent. 2 tables.

Purpose: This study investigates the impact of financial development on economic growth, with a particular focus on the roles of financial institutions' access, depth, and efficiency. It aims to provide a nuanced analysis of the finance-growth nexus and evaluate whether financial development acts as a catalyst for or a constraint on economic growth within the African context. Design/Methodology/Approach: The study employs the Panel ARDL (Autoregressive Distributed Lag) approach to analyze the short-run and long-run effects of financial development on GDP. The analysis is conducted on a panel of 31 African countries over the period 1990–2021, capturing both cross-country variations and dynamic relationships between financial development indicators and economic growth. Findings: The findings emphasize that financial access and depth are key drivers of long-term economic growth, whereas financial efficiency exerts a negative impact. In the short run, financial access significantly enhances GDP, while financial depth may impede growth due to transitional costs or structural imbalances. Moreover, the heterogeneous short-run effects across countries underscore the pivotal role of institutional and economic factors in shaping the financial development and economic growth nexus. Practical Implications: Policymakers should prioritize financial inclusion and sector depth while addressing inefficiencies that may hinder economic performance. Strengthening regulatory frameworks and improving financial institutions’ operational effectiveness can foster sustainable economic growth. Originality/Value: This study provides new empirical evidence on the finance-growth nexus in African economies, considering multiple dimensions of financial development and utilizing a robust econometric approach (Panel ARDL). It contributes to the debate on financial development by distinguishing between access, depth, and efficiency. Paper Type: Research Paper.

Purpose -Th e banking and fi nancial sector is a dynamic sector that regularly goes through a series of structural changes.Global bank consolidation an d concentration processes have prompted a lively discussion on the part of scholars and practitioners regarding the infl uence of concentration on the effi ciency and competition levels in the banking system, the fi nancial and macroeconomic stability of countries and the growth of economies.It has been noted that the banking sector tolerates high levels of concentration rather well compared to other business sectors, thanks to the apparent benefi ts of concentration on the increasing stability of the fi nancial system.Th e aim of this article is to identify underlying causes affecting the mergers and acquisitions in banking and to assess their eff ect on the domestic fi nancial system.Design/methodology/approach -Th e authors used qualitative and quantitative methods of study in analysing the impact of bank mergers and acquisitions on the country's fi nancial system.Th e qualitative analysis has allowed the authors to present their own interpretation of the issue at hand, and has given them a chance to approach the problem of the study holistically.Th e quantitative study has provided a basis for analysing dynamic regularities, performing and comparing calculations, assessing data interrelation and reliability.Th e article includes logical analysis and synthesis of studies dealing with bank mergers and acquisitions.To identify the potential elements that lead to stability in the fi nancial system, and the possible impact that the on-going consolidation process might have on the banking sector, the authors have carried out expert analysis.Findings -Mergers and acquisitions in banking take place to enhance the wellbeing of shareholders and to attain an economic eff ect; the aspect of stability in mergers and acquisitions is short-lived and is usually inspired by the government.Lithuania's modern banking market has evolved through mergers and acquisitions; strategic investors have helped countries with transitional economies ensure the stability of their banking systems and capitalise on economies of scale.Several large banks operating in a small open economy (and a transitional economy in particular) provide the backbone for the stability of its fi nancial sector.Practical implications -Th is research enriches and enhances the potential of Lithuanian science dealing with the topic of banking operations and risk management in the context of the fi nancial system stability.Th e results produced by this research could be applied to analyse and assess consolidation processes that could take place on the markets and in particular, in small open economies.Originality/Value -Th is article dealing with the impact of mergers and acquisitions of banks on the country's fi nancial system is a new and original piece of scientifi c work that evaluates the mutual ties of banks' mergers and acquisitions, as well as their eff ect on the domestic fi nancial system.Th e authors have conducted an in-depth study of the impact of mergers and acquisitions on the country's fi nancial system, revealing potential problems involved in merger and acquisition transactions.

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.

Background: More recently, the influence of financial market in accelerating economic growth has received a considerable attention. Assuring Bangladesh’s stability in financial sector is seen as one of the biggest challenges. To fulfil the Bangladesh government’s twin goals of poverty reduction and economic growth, financial sector development can play a significant role by resource mobilization, higher- return-oriented allocation of capital and facilitating the investment activities. The literature for Bangladesh which lacks of clear-cut or straightforward relationship between financial development and economic growth, will gain a new perspective as a result of this research. Moreover, no investigation has represented the joint association between the variables of interest in the limited period of 1980 to 2019 in Bangladesh. Therefore, this study probes whether the financial development can have a clear-cut impact on the economic growth of Bangladesh and what is the exact direction of the causality between them. Materials and Methods: The study uses the Cobb-Douglas production framework by including measures for economic growth, financial depth, financial efficiency, capital and labor in the aggregate production function. The study takes annual time series data over the period of 1980 to 2019 from World Development Indicator (WDI) of World Bank. The Auto Regressive Distributed Lag (ARDL) bound testing approach of co-integration, error correction model and Granger causality tests are used to investigate the long-run equilibrium and short-run causal relationship among the five variables. Several diagnostic tests confirm the validity and reliability of the model. Results: The results of the co-integration test exhibit that all of the variables in the model maintain a cointegrating relationship among them. The empirical results of the long-run model demonstrate that domestic credit to private sector as a percentage of GDP as well as broad money as percentage of GDP have significant positive influence on economic growth in the long-run. The statistically significant coefficient of Error Correction Term (ECT) holds theoretically correct sign and implies a short-run relationship that adjusts the model towards equilibrium in the long-run with the speed of 23.23%. But in the short-run, the coefficients of financial development indicators are insignificant. Granger causality test reveals the non-existence of short-run causal connection between financial development and economic growth. Conclusion: It is worth mentioning that the financial sector of Bangladesh has to be reconstructed with a special attention as there exist less information access, non-performing loan, money-laundering activities, inefficient channel of funds, unskilled participants, corruption and political intervention in the financial sector of Bangladesh. The study calls for the concerned authorities to adopt effective measures for making an appropriate combination of fiscal, monetary and financial policies to maintain the current long-run positive influence of financial development on the economic growth and thereby to reach the financial sector of Bangladesh as its highest possible stage of success.