Financial Sector Development Research Articles

The Dynamic Effect of Financial Sector Development in Stimulating the Gross National Savings of Djibouti

Abstract Savings are important determinants of wealth. At the macroeconomic level, governments attach importance to saving money in order to make new investments, produce new capital goods, and sustain economic growth. However, due to the high level of internal and external debt in Djibouti, it is nearly impossible for the country to achieve domestic savings. Hereby, the major aim of this study is to examine the dynamic effect of financial sector development in stimulating the gross national saving of Djibouti from the period 1987 to 2021. The paper considered numerous indicators as measurements of the financial sector development including FDI inflows, domestic loans to the private sector, central bank assets to GDP, and money supply. To proceed with the analysis, Non-Linear Autoregressive Distributed Lag (NARDL) was performed and according to the model, the findings highlighted that the Djiboutian financial industry is still in its early development and has not yet made a substantial contribution to boosting the country’s national savings. Nevertheless, the gross national saving of Djibouti was still positively prompted by significant components of the financial sector development, such as the positive shocks of FDI inflows and both the negative shocks of central bank assets and money supply. While both the positive and negative shocks of the credit offered to the private sector were uncovered to diminish the national savings in the long run. In conclusion, the current research will help governments and policymakers understand the best ways to use the financial sector to raise gross national savings. It will also present evidence of how to implement long-term initiatives that can lower public debt and encourage savings. Not to mention, the article provides information on the value of long-term investments.

How does institutional quality determine energy consumption? Empirical evidence from the South Asia region

Purpose Due to an increase in energy demands, it has become vital to devise efficient energy policies. Literature has suggested multiple factors influencing the consumption of specific energy types. Among others, institutional quality (INQ) is another factor that can determine energy consumption. Given this, the current study aimed to investigate the impact of INQ on fossil fuel energy (FFE) and renewable energy consumption (REC).Design/methodology/approach The empirical analysis was conducted on 20 years (2000–2019) of data from South Asian economies, and regression among variables was established by employing the dynamic ordinary least square and fully modified ordinary least square models. The selection of both techniques is subject to the existence of cointegration identified by the Johansen cointegration test. Other pre-estimation techniques include cross-section dependence and unit root testing validating the estimation of coefficients in the long run.Findings The analysis mainly reveals the negative impact of INQ on FFE and the positive impact of INQ on REC. The authors further find the asymmetric impact of control variables including foreign direct investment inflow, economic growth, inflation rate, financial sector development and energy investment on the consumption of both types of energy.Research limitations/implications Given the positive influence of INQ on REC, it is recommended to focus on improving the efficiency of institutions specifically those that are directly linked with energy-related policies. A better INQ can ensure environmental sustainability by enhancing the consumption of renewable energy. Therefore, it is advised to exert more efforts to improve the INQ.Practical implications In view of the positive influence of INQ on REC, it is recommended to focus on improving the efficiency of institutions specifically that are directly linked with energy-related policies. A better INQ can ensure environmental sustainability by enhancing the consumption of renewable energy. Therefore, it is advised to exert more efforts for improving the INQ.Originality/value This study offers robustness to the empirical findings of existing literature on the INQ-REC nexus and complements the underdeveloped literature on the INQ-FFE relationship.

Striving towards 2050 net zero CO2 emissions: How critical are clean energy and financial sectors?

The development of clean energy and financial sectors have been highlighted as critical factors in tackling climate change and achieving net zero emissions goals. Hence, using a dataset for the top 20 emitter countries from 1990 to 2019, this study examines whether clean energy consumption, financial development, human capital, population, and economic growth are connected with environmental quality through a reduction in carbon emissions. The long-run estimates show that renewable energy utilization, financial development, and human capital are significant in reducing CO2 emissions in the quest for net zero emissions. Contrarily, economic growth and population have a increases CO2 emissions. The results of the causality test show a two-way causality between renewable energy use, financial development, economic growth, population, and CO2 emissions. Moreover, one incidence of unidirectional causality is observed from CO2 emissions to human capital. Based on the findings, policy implications are suggested.

Impact of debt on sustainability reporting: a meta-analysis of the moderating role of country characteristics

PurposeAs of 2022, the scope of the engagement and interest of debt capital providers in ESG reporting is mainly untapped. However, a vast amount of literature has produced conflicting findings about the importance of debt capital (leverage) as a factor in sustainability reporting (SR). This is the first meta-analysis reconciling the mixed results of 85 single country studies containing 131 effect sizes across 24,482 firms conducted over past three decades (1999–2022) investigating the influence of leverage on SR. The study emphasizes the significance of contextualizing research by identifying the macro-environmental elements modifying debt's impact on SR, through the use of the institutional theory. Eleven country variables were tested on the collected dataset, spread across 36 countries.Design/methodology/approachMeta-analysis technique for aggregation of existing extant empirical work. Continuous and categorical variable-based moderator analysis to demystify the influence of country characteristics affecting the leverage–SR relationship.FindingsResults show positive significant impact of debt capital providers on SR. Country's level of development, GDP, extent of capital constraints in a country, financial sector development within a nation, country governance factors and corruption levels, country's culture, number of sustainability reporting instruments operational in a country and geographical location proved to be significant moderators.Research limitations/implicationsThe study details relevant meaningful research gaps, worthy of uptake by researchers to produce targeted research.Practical implicationsGovernments must increasingly go beyond their mandated disclosure role and acknowledge the important institutional factors that have contributed to the expansion of ESG reporting through the creation of nation-specific tools, incentive structures and disclosure-encouraging regulations. To secure a steady flow of funding and prevent negative effects on company value and cost of capital in the midst of prolonged global economic upheaval, businesses must address the information requirements of lenders. The limited total effect size emphasizes the necessity for debt providers to step up their ESG activism and exercise their maximum power and potential in stimulating extensive SR firm-level practices.Originality/valueThe present study is the first meta-analysis reconciling the mixed results of 85 single-country studies containing 131 effect sizes across 24,482 firms conducted over the past three decades (1999–2022) investigating the influence of leverage on SR and demystifying the macro-environmental factors affecting the leverage–SR association.

External shocks and macroeconomic volatility in Nigeria: does financial development moderate the effect?

PurposeMotivated by the negative effect of external shocks on the domestic economy, this study explores the role of financial sector development in absorbing the effect of external shocks on macroeconomic volatility in Nigeria.Design/methodology/approachAutoregressive distributed lag and fully modify ordinary least square are used to examine the moderating effect of financial development in the link between external shocks and macroeconomic volatilities in Nigeria between 1986Q1 and 2019Q4. External shock is proxy using oil price shock, and financial development is proxy by domestic credit to the private sector and market capitalisation. At the same time, macroeconomic volatility is proxy by output and inflation volatilities. Macroeconomic volatilities are generated using generalised autoregressive conditional heteroskedasticity (GARCH 1,1).FindingsThe results indicate that domestic credit to the private sector significantly reduces output and inflation volatilities in Nigeria in the short and long run. However, market capitalisation promotes macroeconomic volatility. More specifically, financial development indicators play different roles in curtaining macroeconomic volatilities. The results also reveal that external shocks stimulate macroeconomic volatility in Nigeria in the short and long run. Nevertheless, the effects of external shocks on macroeconomic volatilities are reduced when the role of financial development is incorporated.Practical implicationsThis study, therefore, concludes that strong financial sector development serves as a significant shock absorber in reducing the adverse effect of external shock on the domestic economy.Originality/valueThis study contributes to the extant studies by introducing a country-specific analysis into the empirical examination of how financial development can moderate the influence of external shock on macroeconomic volatilities.

Remittance flows and welfare implications: the Nigerian experience

PurposeIn Africa, recent data show that Nigeria is the second top remittance recipient behind Egypt, but welfare seems deteriorating. Most related reviewed literature is micro-based with surveys, giving credence to the dearth of macro-based literature whose gap this study attempted to fill. Thus, the main purpose of this study is to examine remittance flows and its welfare implications in Nigeria.Design/methodology/approachThe study used quarterly data (1980Q1–2020Q4) from World Development Indicators (2020) and applied the dynamic ordinary least squares (DOLS) model.FindingsRemittance flows were found to be significantly improving the welfare of Nigerians by about 0.04% for a percentage remittance increase. Financial sector development results show that while loans decrease welfare per individual significantly by 0.25% given a 1% increase in the loans accessible by the private sector, a percentage increase in broad money supply in circulation raises welfare per individual significantly by about 0.43%.Practical implicationsSince remittance is found to improve welfare, the study recommends that relevant stakeholders should endeavor to eliminate all form of bottlenecks (payment delays, remitting costs, transfer delays, poor policies and policy inconsistencies) inherent in remitting funds back to Nigeria. The implication of this is that if the impediments are minimized, remittances are bound to rise which will ultimately lead to improved welfare.Originality/valueThe existing literature revealed that there exists very limited or no macro-based study in this context, hence this novelty study.

An empirical study on micro, small, and medium enterprises access to finance in Kosovo: A survey based analysis

This study investigates the access to finance among Micro, Small, and Medium Entities (MSME) in Kosovo, providing an understanding of the financial landscape of this important sector. Utilizing a quantitative research design, the study administered a structured questionnaire to a representative sample of 250 MSME in Kosovo, encompassing a variety of industries and sizes. The questionnaire measured the types of financing used, perceived barriers to accessing finance, and the impacts of financial constraints on the business.Data analysis included descriptive statistics, inferential statistics, and regression analysis. Findings suggest a reliance on internal funds among most MSMEs, with high-interest rates and stringent collateral requirements identified as major barriers to accessing external finance. Moreover, firm size and years of operation appeared to positively influence access to finance. The study concludes with recommendations for regulatory reforms, financial sector development, and capacity building to ease these barriers and enhance MSME growth and competitiveness.Further research is encouraged to probe the effectiveness of different interventions and delve deeper into the experiences of MSMEs in navigating their financial constraints.

An Empirical Investigation of Retail Investors’ Sentiments: Role of Demographics

Purpose: This paper is an explicit effort to explore the various tenets of Investors’ sentiments in Indian context. The purpose of this paper is to examine the Investors’ Sentiments and to know how investors sentiments affects the choices made by retail investors and to know how demographic characteristics drive investment decisions of individuals. Methodology: In carrying out this research study a descriptive design is used. A sample of 683 respondents (retail investors) were selected as part of a sample utilizing the snowball (chain referral) method of sampling. The instrument used for collecting primary data is a well-structured questionnaire and it consists of demographic profiles of respondents. Findings: The attitude of investors’ towards investment decision is influenced by perceived returns, price sensitive information, perceived economic indicators, investors’ confidence and herd behavior. These results emphasize the significance of individual propensities in determining a person’s level of sentiments. Implications: This study will help financial advisors to better understand the attitudes and behaviors of their clients and also be significant for financial institutions, given to positive economic effects of development of financial sector.

Trade Openness, Energy Consumption, and Financial Development Influence on Jordan’s Economy: Evidence from ARDL and Non-Granger Causality Test Approach

The purpose of this study is to analyze the effect of trade openness, energy consumption, and financial development on Jordan's economic development using the Autoregressive Distributed Lag (ARDL) method. By looking at data from 1970 through 2022, the study reveals a short- and long-term impact. Short-term economic development was found to be positively influenced by energy consumption but negatively influenced by trade openness and financial development. However, financial development has a favourable effect on economic development in the long run, whereas trade openness and energy consumption have a negative effect. Furthermore, evidence of a nonlinear bidirectional causal relationship between trade openness and economic development, and evidence of a one-way causal relationship between energy consumption and economic development, were found by the results of Diks and Panchenko's Granger causality test. The development of the economy and the financial sector also demonstrated a reciprocal causal relationship. These findings have important implications for policy and strategic planning for Jordan's economic growth and underscore the need to carefully weigh the potential costs and gains of trade liberalization, financial sector development, and energy consumption.

Nexus between FDI, Financial Development, Capital Formation and Renewable Energy Consumption; evidence from Bangladesh

This paper examines the interplay among foreign direct investment (FDI), financial development, capital formation, and renewable energy consumption in the context of Bangladesh. The study uses empirical evidence to shed light on the nexus between these variables. Panel data analysis techniques investigate the relationship over a specific period. This research provides insights into Bangladesh's dynamic interactions among FDI, financial development, capital formation, and renewable energy consumption. The study reveals significant positive associations between FDI and renewable energy consumption, indicating that FDI inflows contribute to the growth and utilization of renewable energy sources. Moreover, the analysis uncovers a positive relationship between financial development and renewable energy consumption, suggesting that a well-developed financial sector facilitates the financing and implementation of renewable energy projects. Additionally, the study highlights the role of capital formation in promoting renewable energy consumption. The positive relationship between capital formation and renewable energy consumption indicates that investment in physical infrastructure and productive assets supports the expansion and utilization of renewable energy sources. This analysis provides empirical evidence of the interdependencies among FDI, financial development, capital formation, and renewable energy consumption in Bangladesh. Overall, the findings suggest that fostering FDI, improving financial sector development, and promoting capital formation are crucial for enhancing renewable energy consumption in Bangladesh. The study's conclusions have implications for policymakers and stakeholders in designing and implementing strategies to promote sustainable and renewable energy sources in the country.

Joint Business Insurance After the Enactment of the Financial Sector Development and Strengthening Law

Kehadiran Undang-Undang Pengembangan dan Penguatan Sektor Keuangan menjadi kunci strategis terhadap penyehatan asuransi usaha bersama di Indonesia. Penelitian ini menemukan bahwa penekanan Undang-Undang Pengembangan dan Penguatan Sektor Keuangan terhadap tata kelola dan manajemen risiko dari asuransi usaha bersama berpengaruh positif secara holistik terhadap terpenuhinya tujuan dasar dari eksistensi suatu perusahaan asuransi, yaitu sebagai penanggung atas kepentingan para pemegang polis. Penelitian ini adalah penelitian yuridis-normatif yang menggunakan data sekunder sebagai acuan, dengan klasifikasi tujuan penelitian berupa penelitian deskriptif. Penelitian ini menunjukkan bahwa permasalahan ketidaksehatan asuransi usaha bersama di Indonesia selama ini salah satunya disebabkan tidak adanya landasan hukum yang memadai sebagai pedoman dalam tata kelola asuransi usaha bersama sehingga keberadaan Undang-Undang Pengembangan dan Penguatan Sektor Keuangan dan peraturan turunannya berpeluang besar dalam mendorong terciptanya penerapan asuransi usaha bersama yang baik di Indonesia. Lebih lanjut, dibutuhkan koordinasi yang baik dari seluruh pihak terkait dalam implementasi peraturan ini untuk perbaikan yang dicita-citakan terhadap asuransi usaha bersama dapat tercapai dengan baik.

Revisiting the nexus between remittances and financial sector development in Nigeria

Purpose ― The study aims to investigate the impact of remittances on financial sector development in Nigeria using data from 1990 to 2021.Method ― The study examines the variables' relationship using the Autoregressive Distributed Lag (ARDL) and Toda Yamamoto (TY) Causality.Findings ― The study finds that remittances have a positive and significant long-run impact on financial sector development. Total reserves and imports of goods and services have a negative and significant long-run impact. In the short run, remittances and deposit interest rates positively and significantly impact financial sector development, while total reserves and total population have negative and significant impacts. The Toda-Yamamoto causality result indicates a two-way causal relationship between financial sector development and remittances.Implication ― The study recommends that the government employs policies encouraging channeling remittances through a formal banking system, as well as ensuring that such remittances received are channeled to finance productive investment, hence financial development.Originality ― The novelty of this research relates to the use of the three main indicators of remittances in an economy, which are the import of goods and services, total reserves, and deposit interest rates, to examine its impact on financial sector development in Nigeria

The usage of spatial econometric approach to explore the determinants of ecological footprint in BRI countries.

Protecting our environment is not a choice, but a responsibility we owe to future generations. Numerous studies examined the factors affecting the environmental deterioration but this research takes a step further by employing a spatial dependence model to evaluate spatial impact of ecological footprint and its contributing factors, particularly productive capacities which is hardly investigated in economic literature of BRI economies. For the purpose, the annual data of 54 BRI countries is analyzed for the time period from 2000 to 2018 by employing various econometric techniques. The outcomes of the Durbin model express that neighboring economies significantly affect the ecological footprint of an economy, highlighting the need for a regional policy framework to address environmental issues. It is also found that improving the productive capacities, green investment and democratic quality decrease the ecological footprint while per capita GDP, globalization, and development of financial sector increase the environmental deterioration. The significant interdependence of the countries within the region, a regional policy and vision must be implemented to safeguard the environment. The research findings can facilitate policy formulation aimed at promoting environmental sustainability, with particular focus on enhancing productive capacities and green investments.

The role of international tourism, trade openness and renewable energy in the financial development of selected African countries

It is well established that financial development is pivotal to the proper functioning of the real economy and there is a vast body of literature investigating into its determinants. In this study, we shift attention to tourism and renewable energy consumption that are rarely discussed in the financial development debate along with trade openness. Even though, tourism and renewable energy consumption may be less conventional to issues of financial intermediation, they could, along with trade openness, nonetheless contribute to some aspects of financial development in ways consistent with the finance-growth hypothesis. Consequently, this study, while controlling for economic growth, development assistance and government expenditure examines the effects of renewable energy consumption, tourism development and trade openness on financial development in selected African countries. The study relies on data from the World Bank (2023) World Development Indicators for seven African countries (Egypt, Tunisia, Kenya, South Africa, Zimbabwe, Ivory Coast and Morocco) over the periods 1995–2021. Fully Modified Ordinary Least Square (FMOLS) regression estimations reveal that, in the long run, trade openness, international tourism, and renewable energy stimulate financial development. The quantile regression which rendered additional support to this evidence further reveals that, the financial sector gains associated with trade openness, international tourism and renewable energy are greater for countries with lower financial sector development. Thus, a country can still optimize the gains associated with increased trade openness, international tourism, and renewable energy consumption with a relatively less developed financial market. Hence, polices that improve tourism development, promote renewable energy consumption and intensify economic openness may be important catalysts for stimulating further financial development in Africa.

Information technology and financial development for achieving sustainable development goals

The present study aims to answer the question of the effectiveness of information and communication technologies (ICT) and financial development in achieving sustainable development goals (SDGs). Specifically, it examines the joint effects of ICT (mobile phone and internet use) and eight financial sector development indicators on achieving economic, social, and environmental sustainability in light of the SDGs using data from 48 Sub-Saharan African countries. Using the system Generalized Method of Moments, we found that (i) the four dimensions of financial development and both indicators of ICT increase economic, social, and environmental sustainability, (ii) increasing the access to mobile phones and the use of Internet contributes to the development of the financial sector, (iii) the contribution of financial sector development on the achievement of the SDGs increases with the presence of ICT. The study calls on policymakers to consider the diffusion of ICT and the advantages they offer in elaborating measures for achieving sustainable development goals.

Does financial market development really drive migrant remittances’ flow in Sub-Saharan Africa?

PurposeThe discussion on international migration has become a significant part of globalization and a topical issue in international relations, especially in developing economies which mostly relies on migrant remittances. The purpose of the study is to examine whether financial market development (equity market development and banking sector development) really drives migrant remittance flow in Sub-Saharan Africa (SSA).Design/methodology/approachThe study employs the dynamic heterogeneous panel data approach-the pool mean group (PMG) and the mean group (MG) techniques in analyzing the model based on data obtained from 27 SSA countries covering the period 2000–2020.FindingsThe findings of the study revealed that financial market development (equity market development and banking sector development) is a key driver of migrant remittances flows in the SSA region. In addition, the study revealed that the following macroeconomic variables such as real interest rate, unemployment rate, global growth, emigration, and economic growth are also determinants of migrant remittances flows in the SSA region.Originality/valueThe reviewed empirical literature revealed that several studies documents that the macroeconomic determinants of migrant remittances include inflation, GDP, interest rate, exchange rate, population growth, financial sector development and unemployment rate. Most of these studies fail to capture both equity market development and robust banking sector development (financial market development) as critical drivers of migrant remittances flow in SSA. Also, this study uses a robust measure of equity market development and banking sector development, unlike previous studies.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-05-2023-0361

Remittances, Financial Depth and Economic Growth of Malaysia

The objective of this study is to investigate the effects of remittances inflows to Malaysia's economy and does the financial sector development level have influence on remittances impact to economic growth of Malaysia. Time series technique has been adopted to explore long run effect of remittances, financial depth and growth in Malaysia using annual data for the period 1984-2013. The results showed that remittances and financial depth have positive and significant effect on growth in long run. Granger Causality tests are also used to explore the relationship between remittance-growth and financial development-growth. The findings revealed that there is an impact of remittances on economic growth of Malaysia via the influence of the country's financial depth.

External finance dependence, financial development and exports: a firm-level study from India

PurposeThis study aims to add to the growing literature on the trade–finance nexus by exploring the interplay between a country's level of financial development, the external finance dependence of firms and their exporting decisions.Design/methodology/approachThe study first develops a theoretical model to motivate the idea that a firm's liquidity (financial) position and its home country's level of financial development act as substitute factors in its export market entry decisions. It then empirically tests whether an improvement in a country's financial development level enhances the number of entrants in the foreign markets and boosts the exports of incumbent exporters using firm-level data of manufacturing firms in India for the period 1993–2020.FindingsEmpirical results suggest that a higher level of financial development helps increase the exporting probability of firms that rely more on external finance for their operations. Further, the study finds that the sunk costs-induced hysteresis effect plays a major role in firms' exporting decisions and financial factors don't play a significant role in the exporting activities of incumbent exporters.Practical implicationsThe findings suggest that a well-developed financial market is necessary to help more and more firms initiate their foreign market operations. The results underscore that trade-liberalisation measures alone may not increase India's exports and the government must complement them with financial sector reforms.Originality/valueStudies highlighting the role of financial sector development in helping financially-constrained Indian firms overcome the entry barriers associated with exporting are extremely limited. This study contributes to this nascent literature by conducting an empirical investigation on an extensive database of Indian manufacturing firms. Moreover, in contrast to the previous firm-level studies in this area, this empirical analysis uses the actual values of external finance raised by the firms as a critical factor in determining their extensive and intensive margin of exports instead of the usual balance sheet variables such as liquidity and leverage.

Non-linear dynamics in finance–inequality nexus: time series evidence from the Indian economy

PurposeThe principal aim of this study is to examine the relationship between financial development and income inequality in India using the financial Kuznets curve (FKC) hypothesis.Design/methodology/approachThis study uses the autoregressive distributed lag (ARDL) model and the Toda–-Yamamoto causality test to investigate the long-run and short-run relationship and causality between financial development and income inequality. In addition, this study employs a principal component analysis (PCA) to construct a comprehensive financial development index.FindingsThe study found a long-run relationship between financial development and income inequality in India for the period under consideration. Trade is found to improve the income distribution, while inflation worsens income distribution. Moreover, the empirical results revealed a feedback causality between financial development and income inequality. The study results confirm an inverted U-shaped relationship between financial sector development indicators and income inequality, thus validating the FKC hypothesis for the Indian economy.Research limitations/implicationsThe study draws attention of the government and policymakers, urging them to focus on building a strong financial sector by improving its efficiency. This, in turn, will lead to enhanced financial stability and a reduction in income inequality. They should prioritise the development of high-quality and sustainable financial products and services to ensure the robust growth of the financial sector.Originality/valueTo the best of our knowledge, this study is the latest of its kind to empirically test the financial development on income inequality and the FKC hypothesis simultaneously for the Indian economy using financial proxy variables from financial institutions (FIs) and financial markets (FMs) for the measurement of financial depth.

The Impact of Financial Sector Development on Economic Growth: Evidence from Sri Lanka

The Impact of Financial Sector Development on Economic Growth: Evidence from Sri Lanka