Financial Sector Development Research Articles

Economic Growth and Financial Sector Development: Long-Run Structural Break Cointegration and Short-Run Equilibrium Relationships in the East African Community

The EAC countries in a bid to boost economic growth (RGDP) and reduce poverty in the region, implemented several financial sector reforms, however, empirical findings have indicated that financial development (FSD) can have a positive, negative or no effect on economic growth. This study investigated this relationship for four EAC countries including Uganda, Kenya, Burundi and Rwanda using individual country Gregory-Hansen-Quandt-Andrews-Muwanga (GHQAM) cointegration procedure based on OLS/ FMOLS estimations. The findings indicate that in the long-run: i). a cointegration relationship exists between financial development and economic growth but it has not been stable for the periods covered; and ii). the elasticity of economic growth to financial development was zero before and after the break for Uganda and Burundi but ranged between 0.000 - 0.3208 and between 0.2178 - 0.3063 for Kenya and Rwanda, respectively, implying an inelastic relationship for all four countries. In the short-run, RGDP did not adjust to changes in FSD in Burundi while 46.36%, 46.3% and 40.67% to 67.47% of the adjustment of the former to changes in the later occurred in the short-run in Rwanda, Uganda and Kenya, respectively. These results signal the need to review and enhance the transmission mechanisms through which financial development affects economic growth and put in place a favourable environment to ensure positive and elastic effects on economic growth.

The Impact of ICT on Financial Development: An Empirical Evidence from Syria

The digital revolution affects all economic aspects and the financial sector is not an exception. Despite the wide evidence on the impact of Information, Communication, and Technology (ICT) on the financial sector development, this topic has yet to be researched in Syria. We investigate the impact of five proxies of ICT on financial development using multiple regression model for the period 2005 to 2017. We also conduct marginal effect analysis to identify the impact of penetration of mobile phones on the financial development with war and without it. We find that there is a significant positive impact of the number of mobile subscribers on the financial development index in Syria. This result is consistent with Alshubiri et al. (2019) who find that an increase in fixed broadband has a statistically significant and positive effect on financial development in GCC countries. However, the number of telephone subscribers has insignificant impact on the Syrian financial development. The war seems to have a significant negative impact on the financial development in Syria. In addition, we find that the marginal effect of mobile subscription on the financial development index without war is larger compared to the case with war. We conclude that digital transformation has great potentials for advancing the Syrian financial sector especially if accompanied with more investment in ICT infrastructure.

Analysis on the influencing factors of industrial structure upgrading in Northeast China

Based on the panel data of 34 cities in Northeast China, this paper uses fixed-effect model and quantile regression method to empirically test the influencing factors of industrial structure upgrading. The results show that the government has led the upgrading of the industrial structure in Northeast China, economic growth and investment in fixed assets has inhibitory effect on industrial structure upgrade, the level of opening to the outside world, the financial sector development and the increase of human capital in the northeast has obvious role in promoting industrial structure upgrade. The quantile regression results show that the coefficient of each factor are basically consistent with the estimated results of ordinary panel fixed effect model, which further verifies the robustness of the research conclusions in this paper.

The impact of inflation on the financial sector development: Empirical evidence from Jordan

In any economy, the financial sector plays a fundamentally important role in achieving economic growth and thus achieving sustainable economic development. Therefore, interest in this sector and th...

Banking Diversity, Financial Complexity and Resilience to Financial Shocks: Evidence from Italian Provinces

In this paper we investigate the influence of banking and financial diversity on stability. We compute an index of banking diversity for Italian provinces and, drawing from network theory, we propose a measure of the diversity and development of the overall provincial financial sector. Our results show that diversity in the banking and financial markets promotes greater stability. Such beneficial effects are particularly evident during periods of financial distress. We ascribe our findings to the better diversification achieved by more diverse financial systems, as documented by lower loans concentration and higher loans diversification in terms of economic destination and borrower category.

Is financial integration driver of income inequality A panel co-integration analysis in Europe

Research on income inequality and finance has become an increasingly popular research area in the post-crisis period. Fully modified (FMOLS) and dynamic OLS (DOLS) co-integrated regression models are employed to empirically explore and estimate the long run co-integration vector for non-stationary panels between 2000 and 2016. The study finds that a NMS-11 with relatively lower integrated international financial flows experience lower levels of income inequality than older EU-15 members that have more integrated international financial flows. These countries experience greater levels of income inequality. Financial development generally leads to decreased income inequality in the whole sample and the NMS-11, whereas the results are mixed for the old EU-15 members. The study recommends government policies, especially in NMS-11 countries and European transition countries, that prioritise further financial market reforms (credit and stock markets) and greater financial freedom and minimise government interference that are vital to development of financial sector and thus economic growth.

The Social Production of Financial Inclusion of Generation Z in Digital Banking Ecosystems

Digital finance is an emerging frontier of financial sector development in the contemporary 21st century. In spite of the known benefits of digital finance, there is a widely held view that digital financial services have not adequately permeated vast segments of society given the disparities in the availability of finance, its accessibility, and use. Therefore, the evolution of financial technologies along with digital consumer behaviourism in the present age presents scope for re-modelling conventional financial business models to particularly enhance the financial inclusion of Generation Z. This generation presumably has a unique mental construct of digital financial inclusion on account of its financial needs and circumstances, and its intrinsic digital consumer behaviourism. Therefore, this article espouses the Lefebvrean Social Production of Space as a novel theoretical lens through which financial inclusion of Generation Z could be better conceptualised to provide predictive insight for the future development of inclusive digital banking ecosystems. To this end, the article demonstrates, under the Zambian context in sub-Saharan Africa, that Generation Z has the propensity and competence to use digital technologies, but its adoptive response to digital finance is shaped by the perception that conventional banking and finance is highly exclusive. This suggests that the conventional banking ecosystem operates along a continuum between social equity and financial sustainability, posing a conceptual challenge of designing financial business models that are equitable without undermining the sustainability of the ecosystem. It is hereby recommended that for a digital banking ecosystem to be authentically inclusive of Generation Z there must be participatory accountability that considers and embraces the generation’s bidding strategies for financial inclusion, and further facilitates empowerment of this clientele based on the co-evolutionary dynamics of financial technology and digital consumer behaviourism.

Challenges and prospects of virtual banking in Ukraine

The essence of banking business virtualization is considered in this paper. It is noted that this process is an automated delivery of new and traditional banking products and services directly to customers by means of electronic, interactive communication channels. At present, most experts consider virtual banking to be the most promising electronic channel for providing banking services, as it allows you to implement an effective marketing concept of «the bank that is always with you». Virtual banking provides a transition from the traditional way of personal communication of customers with the bank's representatives face-to-face indoors during working hours to remote by connecting to the network anywhere at any time (24 hours a day, seven days a week). Trends in the development of virtual banking are systematized and the key ones are: active use of P2P transfers and increase in the number of payment services for utility and other bills; the growing popularity of making payments using smartphone; support of a single standard for electronic remote identification of BankID customers by the National Bank; active development of P2P lending. Features of electronic identification of the person through Bank-ID which allows confirmation of the user identity, using his bank data, and to receive remote access to administrative, financial, and commercial services are considered. In order to use Bank-ID, simply enter the login and password of Internet banking, from which the government receive the necessary information (passport data, identification code, etc.). It is revealed that today more than 40 participants are connected to the BankID system of the NBU and some banks are still at the testing stage. The provisions of the NBU Fintech Development Strategy until 2025 are analyzed. The strategy defines the priorities and goals of the Ukrainian financial sector development until 2025. The main problems of the virtual banking development in Ukraine are highlighted and it is noted that the cost of digital transformation is the most important barrier to the introduction of new technologies and the transformation of traditional bank into virtual one. Based on the analysis, conclusions about the importance of the banking business virtualization, especially in the current pandemic Covid-19, are substantiated.

The Relationship Between Financial Development and Economic Growth in The United Kingdom: A Granger Causality Approach

This study aims to investigate the causal relationship between financial development and economic growth in the UK using quarterly data from 1963q1 to 2015q1. Three variables were used as proxies for financial sector development, namely, ratios of broad money supply to GDP, ratios of private sector credit to GDP and the ratios of stock market capitalization to GDP. Economic growth was measured using real GDP per capita. In order to achieve stated aim, the study employed the Johansen Cointegration test and the Granger causality test within a vector error correction framework (VEC) to test for the existence (or not) of a long run relationship as well as the direction of causality between financial development and economic growth. The result from the Cointegration test indicates that there is a stable long run equilibrium relationship between financial development and economic growth in the UK. The Granger causality test presents evidence of a bidirectional causality. This suggests that financial development and economic growth are mutually causal, that is, causality runs from both side which is in line with the feedback hypothesis in the literature which argue that financial development and economic growth exhibits a two-way causal relationship. In terms of each individual variable, the study finds that while bank credit to the private sector and stock market capitalisation Granger cause GDP per capita, GDP per capita on the other hand, Granger causes broad money supply.

ФІНТЕХ-КОМПАНІЇ: СУЧАСНИЙ СТАН ТА ПЕРСПЕКТИВИ ВПЛИВУ НА РОЗВИТОК ФІНАНСОВОГО РИНКУ УКРАЇНИ

The article is devoted to the research of Fintech companies in Ukraine. Financial innovations created through the successful implementation of start-ups and the Fintech companies’ activities allow us to see ordinary things in a new way. Without the use of information technology in the financial sector, successful economic development is impossible in today’s conditions of total digitalization, because the implementation of innovations will ensure Ukrainian financial market development. Theoretical aspects of financial market development involving Fintech companies were studied and priority niches for the functioning of Ukrainian Fintech companies were defined. In terms of attracting investors and consumers, the most popular today are Fintech companies that offer innovative payment solutions. The Ukrainian Fintech market was analyzed separately from the point of view of the companies operating on it and peculiarities of Fintech companies’ activity were highlighted. To compare priority directions for Fintech companies, we conducted an analysis of the top 10 Fintech companies in Ukraine and in the world. Financial services are a priority for leading Fintech companies both in Ukraine and in the world. Today, banks occupy the largest share of the financial sector, offering their customers a wide range of financial services. To maintain their position in the financial market, banks are actively implementing financial innovations in their activities and using the services of Fintech companies. Neobanks are the most successful to date. In Ukraine, as well as in Europe, the course of digitalization is clearly traced. The article highlights the main directions of innovative development of the financial market of Ukraine in accordance with the “Strategy of development of the financial sector of Ukraine until 2025”, and also factors that influence the development and growth of Fintech companies in the financial market of Ukraine. The coherence of the strategy for the Ukrainian financial sector development and the strategy for the EU development testifies to the European integration tendencies of development of both Ukraine in general and its financial sector in particular. It is noted that financial innovations and successful development of Fintech companies are the basic directions for the Ukrainian financial sector development.

Asymmetric effect of exchange rate volatility on trade balance in Nigeria

<abstract> <p>The relationship between real exchange rate volatility and the trade balance has been a contentious issue since the fall of Bretton woods agreement of 1973, owing to the lack of unanimity on the effect. This article provides empirical evidence of the link between the real exchange rate volatility and the trade balance in the light of financial development, confirming the assertion that the effect is significantly dependent on the country's level of financial development. Due to Nigeria's relatively undeveloped financial system, its exchange rate dampens the country's exports. Rather than studying the relationship in isolation, we examine the moderating role of financial development on the link between export and the real exchange rate volatility in this paper. The empirical estimation is based on the Nigeria's data set spanning the years 1980–2019, and it employs threshold autoregressive non-linear co-integration and non-linear ARDL estimation techniques. According to the findings, financial development magnifies the beneficial benefits of the real exchange rate on Nigeria's foreign trade. It also states that the uncertainty in foreign capital flows has a negative impact on Nigeria's international trade. The findings have broad policy implications, implying that in order to diversify and improve the economy's future growth and associated international trade, Nigeria's policymakers should promote adequate financial sector development, as financial shocks are amplified by poorly implemented credit markets.</p> </abstract>

Is there a nonlinear relationship between financial development and poverty in Africa?

PurposeThe paper examines whether there is a threshold between financial development and poverty in African economies.Design/methodology/approachThe study adopts the innovative dynamic panel threshold model of Seo and Shin (2016) made practicable by Seo et al. (2019)–the model estimates threshold relationship even in the presence of endogeneity. Also, following the recommendations of Cihak et al. (2013) and Sahay et al. (2015), we also adopt a robust measure of financial development based on the four pillars of financial deepening, stability, efficiency and access derived from the principal component analysis (PCA).FindingsThe empirical results show that there exists a threshold level of financial development necessary for poverty reduction in Africa.Research limitations/implicationsOur result is important for policy formulations. First, individual African country must discover the level of financial development necessary for spurring poverty reduction. Second, policymakers, especially in lower-income countries, must keep improving their financial sector development to achieve the threshold level necessary for achieving poverty reduction even though financial development might seem less relevant at its present level.Practical implicationsThe policymakers in Africa should note that there exists a threshold level of financial development that reduces poverty. Hence, the present level of financial development might have not yielded a considerate effect on poverty. Still, the policymakers must keep pushing on until the threshold is achieved.Social implicationsFinancial development reduces poverty level but it must reach a certain threshold level before it does so. So, we advise African policymakers to continue to develop their financial sector to achieve this threshold.Originality/valueThis seems to be the first work to document the threshold relationship using the dynamic panel threshold. Besides, the study specifically concentrates on Africa dividing the continent into different income levels. Moreover, we adopt a robust measure of financial development unlike extant studies on Africa.

Financial Determinants of Informal Financial Development in Sub-Saharan Africa

This study assesses financial determinants of informal financial sector development in 48 Sub-Saharan African countries for the period 1995-2017. Quantile regressions are used as the empirical strategy which enables the study to assess the determinants throughout the conditional distribution of informal sector development dynamics. The following financial determinants affect informal financial development and financial informalization differently in terms of magnitude and sign: bank overhead costs; net internet margin; bank concentration; return on equity; bank cost to income ratio; financial stability; loans from non-resident banks; offshore bank deposits and remittances. The determinants are presented from a plethora of perspectives, inter alia: U-Shape, S-Shape and positive or negative thresholds. The study not only provides a practical way by which to assess the incidence of financial determinants on informal financial sector development, but also provides financial instruments by which informal financial development can be curbed.

Determinants of financial development in Ethiopia: ARDL approach

Sustainable economic growth requires financial sector development. However, financial development is low in Ethiopia. Hence, the main objective of the study was to examine determinants of financial...

Методологічні та методичні аспекти застосування стрес-тестування у банківській системі України

A specific feature of banks activities in the financial services market is a permanent solution to the contradiction, which is to make a profit at a certain, acceptable level of risk. At the same time, a significant variety of different types of risks leads to the fact that it is impossible to reach their zero level. Thus, one of the cornerstones of the bank activities is to minimize the risks of its activities. One such tool, which has become popular and relevant in recent decades, has been stress testing. In Ukraine, under the influence of international credit and financial institutions, and with the change of the National Bank of Ukraine, conceptual and methodological approaches to minimizing the risks of banks, in 2009 the National Bank of Ukraine approved Guidelines on stress testing in Ukrainian banks, in which the purpose of stress testing, and tasks, individual factors that provoke risks, methods and general mechanism of stress testing are determined. On October 1, 2020, the National Bank of Ukraine began to apply a single procedure and methodology of the process of supervisory inspections and assessment of banks SREP (Supervisory Review and Evaluation Process), the gradual transition to which was provided by the Comprehensive Program for Financial Sector Development until 2020. Stress testing of banks using this model should be continuous, carried out simultaneously for all banks by assessing the size of risks and the quality of their management based on information obtained from the NBU, analysis of existing trends in banks and more. Today, both in Ukraine and in the world, the process of improving the mechanism of stress testing continues, as there are no uniform detailed methods and algorithms for stress testing in banks, which would cover the maximum possible risks inherent in the activities of banks, and could be applied both to individual banks or their groups and to the banking system of Ukraine as a whole.

RISK MANAGEMENT IN THE FINANCIAL SECTOR OF UKRAINE IN THE CONTEXT OF CYBER THREATS AND POST-PANDEMIC ECONOMIC RECOVERY

Purpose. The aim of the article is substantiation of approaches of domestic and foreign scientists to risk management in the financial sector of Ukraine in the context of cyber threats and the need to ensure national security and post-pandemic economic recovery. Methodology of research. General scientific and special methods of scientific research are used in the article, in particular: induction, deduction, scientific abstraction - to reveal the essence of the concepts of "cyber threat", “cyber security" and "digitalization"; statistical and graphical methods - to assess the current situation in the field of cyber defence in the world and the national cyber security index; methods of analysis and synthesis - in substantiating the conclusions of the research. Finding. Definitions of cyber risk, approaches to its interpretation and classification were considered. The importance of cyber security in the digitalization of the national economy was argued. The Strategy of Ukrainian Financial Sector Development until 2025 is analysed. The world statistics of frequency and losses due to cyber-attacks are studied and the cyber threats that caused the greatest losses in Ukraine are identified. The analysis of Ukraine’s positions in the National Cyber Security Index 2020 is carried out. The directions of cyber threat prevention that can be useful for Ukrainian companies are substantiated. Originality. The author’s definition of the term "cyber risk" is proposed, in which special attention in focused on the effects of cyber threats. The importance of cyber risk management in the conditions of inevitability of digitalization in the financial sector of Ukraine is substantiated. Approaches to the prevention of cyber-attacks, the implementation of which is necessary for the successful digital transformation of Ukraine, are proposed. Practical value. The results of the research will contribute to the formation of an effective risk management system in the financial sector of Ukraine in terms of digitalization of the financial space and post-pandemic recovery of the national economy. Key words: national security, cyber risk, cyber threat, cyber defence, digitalization, post-pandemic recovery, fintech.

Islamic Financing Portfolio and its Comparative Growth Potential

Background – Growth has a strong association with financial sector development. As both micro and macro projects significantly count institutionalized financing contented to the access of finance and help to reduce the cost. Islamic finance development incorporates several benefits such as the transformation of the economy towards the Shari’ah compliancy, higher degree of risk-sharing, and integration of returns with the risk/performance associated with the investment venture thus ultimately leading to social prosperity.
 Objectives - This study envisages the exploration of the contribution of different type of Islamic banking financing which Islamic Banks are utilizing in their capital structure, on the economic growth. This assessment may help in empirically identifying the financing which has been fruitful to promote growth. This is because each of these Islamic financing products has their essence in the path of growth.
 Design/methodology/approach - Gross Domestic Product (GDP) is taken as the dependent variable. And the Solow model based controlling variables includes Labor Resource (L), and Physical Capital (K) while the base variable are the financing modes. The quarterly data is collected for 9 countries which are available between 2014Q1 and 2017Q4.
 Findings – The results indicate that other than Istisna financing, all other financings have a positive effect on economic growth, whereas Salam financing has highest growth potency.
 Originality/value – Previous studies lack in providing a country-level comparison of growth effect of country-level Islamic capital structure. While, considering financing as an input of economic growth within a panel data setup. This study is finding growth based weights on the popular Islamic financing options, which policymakers can use to find a particular financing which needs promoting in order to boost economic growth.

Superimposing Space onto the Relationship between Financial Development and Economic Growth

We investigate the relationship between financial development (FD) and economic growth (EG) for a selected sample of 20 emerging market economies by adopting a dynamic spatial modelling framework with common factors. Annual data for the period 1996-2018 is used. Empirical findings suggest that FD affects EG negatively. Furthermore, there are negative spillovers on the EG rates of the neighboring countries which are generated by the financial sector improvements in any single emerging country. This is a striking finding that it questions the old argument that financial sector or financial market development leads always to favorable effects on economic performance. The policy suggestion that follows is that the policy makers in the sampled countries should keep the financial sectors under control by regulations so as to stabilize their EG rates. Besides, they should design economic policy measures to protect their economic performances from the negative spillovers transmitted from the neighboring emerging countries.

The Effect of Financial Sector Development on Carbon Emission in Thailand

Economic development typically faced many hurdles, like policymakers do not focus on the potential factors which create hurdles in economic development. One of the problems of economic development is climate change, which directly caused global warming. Climate change and global warming occurred due to human induced greenhouse gas production and the use of fossil fuel (manufacturing and industrial process) which produce a massive amount of carbon emission gas. Furthermore, climate change has many side effects like the rapid loss of glaciers, rising sea levels, severe heat waves, etc. Thailand is the land of tropical beaches but even the temperature increased to a certain high level in summer due to the effect of climate change. According to the intergovernmental panel report, the sea level increased over time due to climate change which is almost the average of 1.8 mm per year. So, this situation is unpredictable and the arid zone of this country is now facing the severity of droughts with increased frequency. So, the objective of this study is to examine the long run association between carbon emission, energy consumption, and financial development in Thailand. This study used the timer series data from 1980 to 2018 which is taken from (World Bank, 2020). The autoregressive distributed lag (ARDL) model was used to examine that long run relationship and the results indicate that there exists a uni-directional and long run relationship among financial development and carbon dioxide. So, policymakers highlight the issue of global warming and serious action against the excessive use of carbon emission because it is a serious obstacle to human wellbeing which results in an unproductive capacity of the employee. Furthermore, the government needs to establish policies that help companies to adopt environmentally-friendly equipment’s which produce less carbon emission.

Effects of financial development on income inequality in East Java Province

The research purposes are: (1) to determine the effect of financial sector development on income inequality in East Java Province, (2) to determine the effect of regional characteristics on income inequality in East Java Province. The study uses descriptive quantitative methods. The analysis method uses panel data regression with time series from 2013 to 2017 and cross-sections of 38 districts in East Java Province. The study results are as follows: (1) financial development has a negative and significant effect on income inequality, (2) the regional budget has a positive and significant effect on income inequality in East Java Province, (3) population density has a positive and significant effect on income inequality, (4) poverty has a positive and significant effect on income inequality, and (5) unemployment has no influence and is not significant in income inequality.