Financial Intermediary Development Research Articles

An Econometric Investigation in to Financial Intermediation, Domestic Investment and Economic Growth in Cameroon

The finance-growth causalities have been widely investigated in the literature on finance and growth. Though it is generally accepted that finance affects economic growth and vice versa through capital formation, this channel has not received much attention in recent empirical works. It is on this ground, that this study is designed to examine the interactions between financial intermediation, domestic investment and economic growth in Cameroon. Using time series data from 1975 to 2014 inclusive obtained from World Development Indicators, and using the Vector Autoregression approach, results reveal that financial intermediation doesn’t have a significant effect on domestic investment in Cameroon. We found no causality from financial intermediation to domestic investment in Cameroon except in the case of commercial bank credit to GDP ratio. There was also no causality running from domestic investment to financial intermediation in Cameroon. Findings also revealed the significant effects of domestic investment, broad money, ratio of narrow money to broad money, Financial Intermediation Development index2 and Financial Intermediation Development index3 on Cameroon’s economic growth while the effects of domestic credit to private sector, central government claims and commercial bank credit to GDP ratio are insignificant.

Interaction between financial intermediation efficiency and economic growth

Financial intermediaries have the key role in making a connection between savings and investments. Given the fact that an efficient transfer of savings into investments is made more difficult by transaction and information costs, financial intermediaries are specialized in minimizing the said costs per unit of invested capital. They are also trained to identify productive and innovative investment endeavors which contribute to the growth of real output. Real output growth is the basis for increasing the financial potential, which creates the basis for the development of financial intermediaries. In connection with that, apart from the analysis of the relevant factors making the process of the mobilization and transfer of savings more difficult, the theoretical models that put an emphasis on the relationship between the efficiency of financial intermediation and economic growth are discussed in the paper. The research results are indicative of the fact that the improvement in financial intermediaries' business doing enables faster economic growth. Simultaneously, the growth of the economic activity increases the scope of the business operations conducted by financial intermediaries. Thanks to the effects of the economies of scale that contribute to a reduction in transaction and information costs, the efficiency of financial intermediations grows.

Financial Development and Regional Innovation Output Growth: Based on Empirical Analysis of Provincial Panel Data in China

The paper conducts empirical analysis of influence of financial development on regional innovation through establishing effect regression model of panel data based on the economic data from 2003 to 2014 in 31 provinces and cities. Because the financial intermediary and security market are the main source of financial capital required in technical innovation, the paper discusses the influence of financial development on regional innovation output from two angles of financial intermediary development and credit market development, and compares the regional differences of the influence on this basis. The results show that in the nationwide respective, whether the development of financial intermediary or security market has obvious positive influence on the regional innovation output, while the influence degree of the former is larger than the latter. In the regional perspective, the development of security market in the eastern region generates more obvious influence on the regional innovation, and the financial intermediary in central and western region generates more obvious effect in driving the growth of regional innovation output, while the development of security market has no obvious effect in the regional innovation output growth in central and western region.

Financing Constraints And Financial Development: Evidence From Selected African Countries

Economic theory posits that financial development eases firm level financing constraints by mitigating information asymmetry and contracting imperfections. This paper empirically tests for this notion by using firm level data from selected African countries. The sampled firms show positive and significant investment cash flow sensitivity coefficients indicating they are financially constrained. Financial development is found to have a significant and negative effect on the estimated cash flow sensitivity coefficients indicating it reduces firm financial constraints. The result further shows that such positive role of financial development is attributed to financial intermediary development and not to stock market development. A unique result to the African reality is that even firms in countries with high level of financial development are financially constrained. This implies the financial development in Africa is too weak and more policy attention is needed in this regard.

Tribalism and Financial Development

We assess the correlations between tribalism and financial development in 123 countries using data averages from 2000-2010. The tribalism index is used to measure tribalism whereas financial development is measured from perspectives of financial intermediary and stock market developments. The long-term variable is stock market capitalisation while short-run indicators include: private and domestic credits. We find that tribalism is negatively correlated with financial development and the magnitude of negativity is higher for financial intermediary development relative to stock market development. The findings are particularly relevant to African and Middle Eastern countries where the scourge is most pronounced.

Firm investment, liquidity and bank health: A panel study of Asian firms in the 2000s

We investigate how firms responded to the deterioration of bank health during the financially turbulent periods in the late 2000s in investment decisions and demand for liquidity. We shed light on the cash flow sensitivity of investment and cash holdings using panel data for Asian firms in economies at different stages of financial development.We find that the cash flow sensitivity of investment and cash holdings rises as bank health deteriorates. Moreover, the impact of non-performing loans on the cash flow sensitivity is more prevalent across firms in economies with a higher level of financial intermediary development. As financial intermediaries develop, firms become more dependent on bank credit and bank-dependent firms are more vulnerable to external shocks hitting the financial system. Therefore, when bank health is impaired, bank-dependent firms increase their reliance on internal funds and raise their propensity to save out of cash flow to materialize profitable investment opportunities in the future.

Money, liquidity and welfare

This paper develops an analytically tractable Bewley model of money demand to shed light on some important questions in monetary theory, such as the welfare cost of inflation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 3–4% to avoid 10% annual inflation. The astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer-stock-insurance value of money, thus hindering consumption smoothing at the household level. Such an inflation-induced increase in consumption risk at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of financial intermediation can mitigate the problem, with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our findings provide a strong justification for adopting a low inflation target by central banks, especially in developing countries where money is the major form of household financial wealth.

Investing in Low-Trust Countries: Trust in the Global Mutual Fund Industry

We hypothesize that trust plays an important role in affecting the activeness and effectiveness of the global mutual fund industry. Empirically, trust is positively associated with the activeness of domestic funds, whereas for internationals mutual funds conducting cross-border investments activeness is bounded by the trust of low-trust countries. In both cases, trust-related active share delivers superior performance, whereas the economic magnitude is larger for cross-border investments (around 2% per year). Our results suggest that trust, including both trust in managers and trust in the market, may significantly affect the development of financial intermediaries and the efficiency of global investment.

Causality Relationship between Financial Intermediation by Banks and Economic Growth: Evidence from Serbia

This paper empirically examines the possible causal relationship between financial development and economic growth in Serbia. In this regard, the focus is on the development of financial intermediation by banks, considering the fact that the banking sector plays an important role in Serbian financial system. The empirical research is based on quarterly data for the period Q1 2004-Q4 2011 by using Toda-Yamamoto causality test. Our empirical findings suggest that process of economic growth contributes to process of financial deepening. On the other hand, the results indicate that there is a significant unidirectional causality that runs from both private enterprise credit to GDP and household credit to GDP to economic growth. Bidirectional causal relation is confirmed only between the share of bank credit to nonfinancial private sector in total domestic credit and economic growth rate.

Bundling Governance: Finance Versus Institutions in Private Investment Promotion

Purpose – The study extends the debate on finance versus institutions in the promotion of investment documented by Acemoglu and Johnson (2005), Ali (2013) and Asongu (2014). We assess the effects of various components of governance on private investment, notably: political, economic and institutional governances. Financial indicators of depth, allocation efficiency, activity and size are used.Design/methodology/approach – An endogeneity robust dynamic system GMM estimation technique is employed. Principal component analysis is also employed to reduce the dimensions of governance variables. The empirical evidence is based on 53 African countries for the period 1996-2010. Findings – The findings provide support for the quality of governance as a better determinant of private investment than financial intermediary development. Moreover, the evidence of finance and governance as substitutes in their impact on investment implies that good governance fuels private investment and this positive impact is stronger in nations with less developed financial systems. This finding is consistent with Ali (2013) and contrary to the results of Asongu (2014c).Practical implication – Policy measures for fighting involuntary and voluntary surplus liquidities are discussed. The paper provides additional support for the need of strengthening governance institutions to promote investment on the one hand and fighting financial allocation inefficiency by mitigating surplus liquidity issues on the other hand. Originality/value – The paper extends the debate on the substitution of finance and institutions in the promotion of private investment.

How Has Mobile Banking Stimulated Financial Development in Africa?

In the first empirical assessment of the incidence of mobile banking on financial intermediary development in Africa, we use two definitions of the financial system: the traditional IFS (2008) and Asongu (2011) measures of financial sector importance. When the conception of a financial system is based only on banks and other financial institution (IFS, 2008), mobile banking has a negative incidence on traditional financial intermediary dynamics of depth, activity and size. However, when a previously missing informal-financial sector component is integrated into the definition (Asongu, 2011), mobile-banking has a positive incidence on informal financial intermediary development. Three major implications result from the findings. (1) There is a growing role of informal finance in developing countries. (2) The incidence of the burgeoning phenomenon of mobile-banking cannot be effectively assessed at a macroeconomic level by traditional financial development indicators. (3) It is a wake-up call for scholarly research on informal financial intermediary development indicators which will oriented monetary policy; since a great chunk of the monetary base(M0) in less developed countries is now captured by mobile-banking.

Linkages between Investment Flows and Financial Development: Causality Evidence from Selected African Countries

Purpose - This paper introduces previously missing financial components (efficiency, activity and size) in the assessment of the finance-investment nexus. Design/Methodology/Approach - VAR models in the perspectives of VECM and short-run Granger causality are employed. Usage of optimally specified econometric methods in contradiction to purely discretionary model specifications in mainstream literature. Findings - Three main findings are established: (1) while finance led investment elasticities are positive, investment elasticities of finance are negative; (2) but for Guinea Bissau, Mozambique and Togo, finance does not seem to engender portfolio investment; (3) contrary to mainstream literature, financial efficiency appears to impact investment more than financial depth. Practical Implications - Four policy implications result: (1) extreme caution is needed in the use of single equation analysis for economic forecasts; (2) financial development leads more to investment flows than the other way round; (3) financial allocation efficiency is more relevant as means to attracting investment flows than financial depth; (4) the somewhat heterogeneous character of the findings also point to shortcomings in blanket policies that are not contingent on country-specific trends in the finance-investment nexus. Originality/Value - (1) Contrary to the mainstream approach we use four measures of financial intermediary development (depth, efficiency, activity and size) as well as four types of investment flows (domestic, foreign, portfolio and total); (2) The chosen investment and financial indicators are derived upon preliminary correlation analysis from the broadest macroeconomic dataset available on investment and financial intermediary flows.

New Financial Intermediary Development Indicators for Developing Countries

Financial development indicators are often applied to countries/regions without taking into account specific financial development realities. Financial depth in the perspective of monetary base is not equal to liquid liabilities in every development context. This paper introduces complementary indicators to the existing Financial Development and Structure Database (FDSD) and unites two streams of research. It contributes at the same time to the macroeconomic literature on measuring financial development and responds to the growing field of economic development by means of informal financial sector promotion and microfinance. The paper suggests a practicable way to disentangle the effects of the various financial sectors on economic developments.

Mercado de capitales, intermediación financiera y crecimiento económico en el Perú: 1998-2008

En concordancia con trabajos teóricos y evidencia empírica sobre la relación entre el desarrollo de los intermediarios financieros y del mercado de capitales con el crecimiento económico, se ha encontrado la existencia de una relación positiva entre el desarrollo del sistema financiero peruano con el crecimiento económico durante el periodo 1998-2008. Estos resultados sugieren que el desarrollo de los bancos medido a través del crédito bancario, apoya y sigue al crecimiento económico, y por lo tanto sugiere que los bancos solo cumplen una función estrictamente técnica de asignación de recursos en el proceso productivo. De otro lado, la evidencia empírica nos señala que el crecimiento económico no es explicado por el desarrollo del mercado de capitales, concluyéndose que el mercado de capitales no es una fuente importante de recursos financieros para el crecimiento de la actividad económica en el Perú.

Linkages between investment flows and financial development

Purpose – The purpose of this paper is to introduce previously missing financial components (efficiency, activity and size) in the assessment of the finance-investment nexus. Design/methodology/approach – Vector autoregressive models in the perspectives of Vector Error Correction Model and short-run Granger causality are employed. There is usage of optimally specified econometric methods as opposed to purely discretionary model specifications in mainstream literature. Findings – Three main findings are established: first, while finance led investment elasticities are positive, investment elasticities of finance are negative; second, but for Guinea Bissau, Mozambique and Togo, finance does not seem to engender portfolio investment; and finally, contrary to mainstream literature, financial efficiency appears to impact investment more than financial depth. Practical implications – Four policy implications result: first, extreme caution is needed in the use of single equation analysis for economic forecasts; second, financial development leads more to investment flows than the other way round; third, financial allocation efficiency is more relevant as means to attracting investment flows than financial depth; and finally, the somewhat heterogeneous character of the findings also point to shortcomings in blanket policies that are not contingent on country-specific trends in the finance-investment nexus. Originality/value – First, contrary to the mainstream approach we use four measures of financial intermediary development (depth, efficiency, activity and size) as well as four types of investment flows (domestic, foreign, portfolio and total). Second, the chosen investment and financial indicators are derived upon preliminary robust correlation analyses from the broadest macroeconomic data set available on investment and financial intermediary flows.

Regional Financial Development and Financing Constraints in R&D Investments: A Panel Study of Chinese High-Tech Firms

We apply the Q-Theory investment model to a panel of high-tech firms listed on the Chinese stock market during 2008 and 2011, to study the effect of financial development in reducing financing constraints of firm's R&D growth. Based on the sizable discrepancies of stock market and financial intermediary development in east, middle and west regions of China, we also split the sample into subsamples based on firm location to conduct the analysis. Empirical estimation provides strong evidence that financial development in both credit and stock market has a large effect on reducing financing constraints. This effect is most significant in the financially more developed east region of China. In the financially less developed middle region, the marginal effect is larger in scale but less significant.

African financial development dynamics: big time convergence

Purpose – Assessment of African financial development dynamic convergences in money, credit, efficiency and size. The paper aims to discuss these issues. Design/methodology/approach – The empirical evidence is premised on 11 homogenous panels based on regions (Sub-Saharan and North Africa), income-levels (low, middle, lower-middle and upper-middle), legal-origins (English common-law and French civil-law) and religious dominations (Christianity and Islam). The paper examines convergence in financial intermediary dynamics of depth, efficiency, activity and size. Findings – Findings suggest that countries with small-sized financial intermediary depth, efficiency, activity and size are catching-up countries with large-sized financial intermediary depth, efficiency, activity and size, respectively. The paper also provide the speeds of convergence and time necessary to achieve a full (100 percent) convergence. Practical implications – The presence of strong links among African banking sectors may present little opportunity for portfolio diversification. The convergence patterns show positive steps toward regional integration. As a policy implication, African governments should not relent in structural and institutional reforms. Originality/value – It is the first critical assessment of convergence in financial intermediary development dynamics in the African continent.

What factors explain stock market retardation in Islamic Countries

Stock markets have been recognized in literature as a source of financial development and economic growth. Notwithstanding the recent trend of the stock market development in emerging countries, some argue that Islamic countries' stock exchanges are still infantile. The central aim of this research, therefore, is to investigate factors impeding stock market development (SMD) in Islamic countries. We explore a panel annual data of 11 main Islamic countries vis-à-vis the developed countries for the period of 1996–2011. The findings show that all of our concerned macroeconomic determinants play a major role in the developed countries. On the other hand, financial openness has substantially less contribution in Islamic countries, while the financial intermediary development plays a major role. The results are also indicative of the need for the Islamic countries to improve their legal environment and economic freedom. Lastly, we also attempt to measure the integration level, where the findings tend to indicate a relatively lower and unstable pattern of integration for the Islamic countries, suggesting the impact of volatile inflows.

What A Puzzle It Is! Does Financial Development Really Benefit Economic Growth?

This study investigates the impacts of financial intermediary and stock market on economic growth for 49 countries over 1960~2004. The results show that stock market exhibits significantly positive effects on economic growth. On the contrary, financial intermediary displays significantly varying effects of economic growth over the level of financial intermediary development. Financial intermediary accelerates economic growth in low level of financial intermediary development, and turns to mitigate economic growth as financial intermediary development getting into high level. Furthermore, this essay finds that stock market does assist in boosting both of productivity growth and capital accumulation, and thus speeding up economic growth for both of developing and industrial countries over 1980~2004. And, it boosts productivity growth primarily by advancing technical progress (frontier shift effect), rather than improving efficiency (catching up effect) in all of sample countries. In contrast, financial intermediary conveys its impacts on economic growth primarily only by productivity growth, rather than by capital accumulation. And, the impacts of financial intermediary on productivity growth mainly by efficiency change effect, rather than by technical change effect.

Money, Liquidity and Welfare

This paper develops an analytically tractable Bewley model of money demand to shed light on some important questions in monetary theory, such as the welfare cost of inflation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter values that best match both the aggregate money demand curve suggested by Lucas (2000) and the variance of household consumption, agents in our model are willing to reduce consumption by 3% ~ 4% to avoid 10% annual inflation. The astonishingly large welfare costs of inflation arise because inflation increases consumption risk by eroding the buffer-stock-insurance value of money, thus hindering consumption smoothing at the household level. Such an inflation-induced increase in consumption risk at the micro level cannot be captured by representative-agent models or the Bailey triangle. Although the development of financial intermediation can mitigate the problem, with realistic credit limits the welfare loss of moderate inflation still remains several times larger than estimations based on the Bailey triangle. Our findings provide not only a justification for adopting a low inflation target by central banks, but also a plausible explanation for the robust positive relationship between moderate inflation and social unrest in developing countries where money is the major form of household financial wealth.