Abstract
The last two decades have seen a sharp increase in shadow banking activities in both advanced and emerging economies. Shadow banks have therefore become an important part of financial markets due t...
Highlights
The main argument for proliferation and growth of shadow financial services is that financial innovation promotes economic activity by enabling economic agents to ameliorate financial market imperfections (FSB, 2013; Henderson & Pearson, 2011)
Determinants of firm profitability we briefly review the literature on the determinants of firm performance and link it to shadow banking
The present study investigates the relationship between shadow banking growth and various measures of profitability in South Africa
Summary
The main argument for proliferation and growth of shadow financial services is that financial innovation promotes economic activity by enabling economic agents to ameliorate financial market imperfections (FSB, 2013; Henderson & Pearson, 2011). This provides an alternative capital source to the two most reviewed in literature, mainly bank based and market-based capital (Boot & Marinč, 2010) Following this argument, one is persuaded to conclude that firms’ profitability increases with an up-surge in shadow banking activity (Lu, Guo, Kao, & Fung, 2015). That differences in structure of financial markets and regulatory environment are important determinants of the effect that shadow banking has on the economy It is on this backdrop that this study analyses the impact of shadow banking on firm profitability in South Africa. A trade-off should exist between shadow banking and formal banking (Meeks et al, 2017) Two explanations support this trade-off, firstly, when there is shortage in funding, innovative financial agents introduce new ways of providing finance, usually outside mainstream banking activities (Adrian & Ashcraft, 2016).
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