Financial Sector Development Research Articles

Місія банків за участю держави в капіталі у відновленні економіки

Introduction. The global pandemic crisis of 2019-2021 and the war of 2022 have exacerbated problems in the economy. In the extreme conditions of martial law, the domestic financial system demonstrated its institutional capacity, prevented a panic among creditors and kept the country's money circulation stable. In addition, millions of forced migrants were provided with the opportunity to pay in Europe with payment cards issued by Ukrainian banks in hryvnia. Problem Statement. Current risks of the global financial crisis and the role of state-owned banks in supporting the economic growth in the conditions of martial law and the post-war recovery of Ukraine's economy. Purpose. The goal is to provide proposals for neutralizing negative economic phenomena in the country and to justify changes to the development strategy of banks with the participation of the state in the capital. Methods. The research is based on the identification of patterns of the financial sector development as a whole and the banking system in particular; systemic approach - when clarifying interrelationships between its institutions; statistical comparisons and groupings, analysis and synthesis - in the process of researching monetary environment, forming and placing the resource potential of banks. Results. The main problems in the world economy and how they affect the current situation in Ukraine are considered. To a large extent, the capacity of the financial system has been achieved thanks to the market behavior of banks with the participation of the state in the capital (hereinafter - BDK), which occupy dominant positions on the market. The question of their role and place in the post-war reconstruction economy is of importance. Conclusions. It is expedient to expand the BDK network to the municipal level. In order to increase the liquidity of banks, the creation of a state company to work with negatively classified assets that were damaged as a result of military operations is justified. Changes are proposed in a number of provisions of the BDK development strategy until 2025. In order to generate a long-term credit resource, there is a need to establish a national bank for reconstruction and development through the restructuring of one of the BDKs, as well as the Company for the management of negatively classified assets to clean up the balance sheets of the BDK. The government’s investment activity is expected to increase in order to develop priority programs in the defense, energy and infrastructure sectors.

The asymmetric and long-run effect of energy productivity on environmental quality in Ireland.

This study aims to examine the long-run asymmetric impact of energy productivity on environmental quality in Ireland. The data set covers the period from 1990Q1 to 2019Q4. Although the border issue has been the source of contention and terrorism for decades in Ireland, the country is conscious of modern innovations and has a coherent body of environmental law. Ireland's goal is to achieve 80% of its electricity as renewable energy and reduce carbon emissions by 51% in 2030. Unlike earlier studies, the novelty of this study lies in the thorough analysis of how energy productivity affects the quality of the environment in Ireland while controlling for financial development, primary energy consumption, and economic growth utilizing the nonlinear ARDL approach and other robust econometric techniques. Precisely, the results indicate that (i) energy productivity benefits the environment by lowering CO2 emissions (CO2E) in the long term; (ii) financial sector development enhances the quality of the environment in Ireland; (iii) increase in primary energy consumption and economic growth without eco-friendly protocols propel an increase in CO2E. These findings support the economic theory that energy productivity can stimulate steady green living and green technological growth. We recommend that policymakers in Ireland invest in energy productivity and prioritize R&D that embraces cleaner technologies and cross-cutting eco-friendly policies to combat environmental challenges in Ireland and the world at large.

Inflation Everywhere is a Monetary Phenomenon: An Introductory Note

Ever since the 1970s, when inflation became a virtually global phenomenon, controlling inflation has become a high priority for policy-makers. Given the well-known costs of inflation, policy now in all countries is inflation-averse. Perhaps one of the more important adverse consequences of inflation may be that high and persistent inflation is a regressive tax1 which adversely impacts the poor.2 The poor are extremely limited in their options to protect themselves against inflation; they are normally asset-poor, while most of their saving is in the form of cash. Inflation erodes cash savings and protects the rich who hold real assets.3 It is not surprising that inflation may be politically costly for the government. Studies have also found that high and volatile inflation has been detrimental to growth and financial sector development. Resource allocation is inhibited as inflation obscures relative price changes and thus inhibits optimal resource allocation. For policy to control inflation, it is important to understand the factors that drive inflation. Unquestionably, empirical evidence points to “inflation being always and everywhere a monetary phenomenon” [Friedman (1963)]. However, there still remains some debate on whether supply-side factors could cause inflation without monetary accommodation.4 The structuralist school of thought holds that supply constraints that drive up prices of specific goods can have wider repercussions on the overall price level. Similarly, there are a number of possible sources of rising costs such as wages, profits, imported inflation-exchange rate, commodity prices, external shocks, exhaustion of natural resources, and taxes. For example, in Pakistan, increases in the wheat support price have frequently been blamed for increasing inflation.5 ........

Linkages between Stock Market Development, Banks and Economic Growth in India: An ARDL Approach

The banking and stock market development was perceived to be an essential channel for economic growth through mobilisation and allocating productive investments. On the other hand, it was emphasised that economic growth would create demand for financial services and would lead to financial sector development. Existing literature attempts to investigate whether financial development is the primary driver of economic growth or vice versa. However, the issue remains unsolved and ambiguous. The present study investigated the causal relationship between stock markets, banks and economic growth in India using Autoregressive Distributed Lag (ARDL) bounds testing approach. The empirical result confirmed the long-run bidirectional relationship between financial development and economic growth in India. In the short-run, the empirical evidence showed that the market capitalisation of the Bombay Stock Exchange and IIP were unrelated and that a bidirectional relationship existed between the value of shares traded on the Bombay Stock Exchange and output. Furthermore, the findings supported unidirectional causality from the National Stock Exchange market capitalisation to output in the short-run. The value of shares traded on the National Stock Exchange and output had a feedback connection.

FINANCIAL SECTOR DEVELOPMENT AND REAL SECTOR GROWTH – ASSOCIATION, SPILLOVER AND CAUSALITY DURING PRE COVID AND COVID REGIMES

In this paper, we propose an alternative approach to understanding the relationship between financial sector development and real sector growth in India. We use stock market sectoral indices available on National Stock Exchange (NSE) like Capital Goods Index, FMCG Index, Energy Index, Infra Index, Metal Index, Realty Index, and Auto Index to represent the real sector. To represent the financial sector, we consider Bank Index and Financial Services Index separately. The proposed framework examines the relationships at a granular level to understand the extent of association, spillover, and causality. We also analyze the relationship between the financial sector and the real sector in Pre COVID and COVID periods separately. Our research methodology includes the use of Detrended Cross-Correlation Analysis (DCCA), Wavelet Multiple Correlation (WMC), Wavelet Multiple Cross Correlation (WMCC), Diebold-Yilmaz spillover Framework, and Non-Linear Causality Test. Our granular approach has enabled us to examine the relationships in different periods and we observe that the results change. The intensity of the relationships also is different during the COVID period as compared to Pre COVID period.

CURRENT ACTIVITIES OF TRANSNATIONAL BANKS IN THE GLOBAL ECONOMY

The article defines modern trends of transnationalization in the international banking sphere. The prerequisites for the formation and development of globalization processes in the financial and banking sphere are considered: economic factors, technological and international legal factors. The general definition of a transnational bank is substantiated, the essence of which can be considered in the context of quantitative and qualitative aspects of its definition. A general definition of a transnational bank is provided as a bank that carries out operations in more than one country. The most characteristic trends in the development of transnationalization of the international banking business are outlined, which include the universalization of bank activity, the growth of competition in the banking sector, the liberalization of banking operations, and the growth of innovative activity of banks. The negative consequences of the development of international banking operations are also determined. The characteristic trends of transnationalization in the banking sphere were studied and the leading transnational banks were selected by the level of market capitalization. The peculiarities of the development of the domestic banking system, which is considered as an attractive host area for transnationalization processes, are evaluated. The influence of transnational banks on the economy of the host country and its banking system is considered from the point of view of the consequences of financial liberalization of the world economy as a whole and the development of the domestic financial sector. Identified obstacles on the way to the formation of Ukrainian transnational structures: the instability of the economic and political situation in the state; underdevelopment of the legislative framework in matters of the status and activities of transnational corporations; strong competition from existing global multinational corporations; lack of an appropriate innovation base that could compete with the technologies of foreign multinational corporations; relatively low level of management; high «tinization» of the economy; high level of inflation, etc. The main reasons that caused the changes in the banking sector in modern globalization conditions are proven: the unification of the activities of the real sector of the economy and the financial system of the countries of the world, convergence of the rules for regulating internal and external operations; formation of a network of branches of transnational companies; transformation of the international capital market into an independent factor in the development of the world economy; increase in the share of international operations of banks in the total volume of operations. On the basis of the conducted analysis, suggestions are provided regarding the further development of the activities of transnational banks in the world economy.

Monetary policy, financial development and firm investment in Pakistan: an empirical analysis

PurposeThis paper aims to empirically examine the presence of a balance sheet channel (BSC) of monetary transmission mechanism (MTM) using firm-level panel data of Pakistan. It also explores the role of financial sector development (FSD) and firm age (FAge) in formulating the effect of monetary policy (MP) on the investment decisions of firms.Design/methodology/approachThe authors applied the two-step system generalized method of moments (SYS-GMM) estimator proposed by Blundell and Bond (1998) to carry out the empirical analysis. The final sample of the study includes 450 nonfinancial firms listed at the Pakistan Stock Exchange (PXS) during the period 1988–2021. The empirical framework of the study is based on the new classical model of investment. Different measures of MP are used to obtain the robust empirical evidence. To take into account the different dimensions of FSD, the index developed by Svirydzenka (2016) is utilized. To examine the moderating role of FSD and FAge, the interacted model is estimated, which enables the authors to estimate the MP effects at different percentiles of the moderating variables.FindingsThe study’s findings confirm the existence of BSC by revealing that MP instruments have negative, significant effects on firms’ investment decisions. These findings suggest that during periods of tight MP, firms significantly cut their investment expenditures. The results of the interacted model show that both FSD and FAge play an important role in lessening the adverse effects of MP on firms’ investment policy. Specifically, the calculated total effects suggest that the negative effect of MP on investment is considerably weaker at the higher percentiles of FSD and FAge.Practical implicationsThe findings of the study have several important policy implications for different stakeholders. Specifically, the evidence suggests that the monetary authorities should keep in mind the adverse effects of MP while designing tight MP. The tight MP will have a negative effect on firm investment, which, in turn, will adversely affect firm growth and subsequently the growth rate and level of employment in the economy. Thus, during episodes of tight MP, the authorities should provide other facilities such as a friendly tax environment, better legal and regulatory framework, special credit arrangements, and provisions of loan guarantees. The findings of the moderating role suggest that the government may improve FSD to minify the adverse impacts of tight MP. Finally, the findings suggest that the government should design external financing-friendly policies to provide more opportunities to newly established firms to avoid tight MP’s effects.Social implicationsThe findings of the moderating role suggest that the government may improve FSD to minify the adverse impacts of tight MP. Finally, the findings suggest that the government should design external financing-friendly policies to provide more opportunities to newly established firms to avoid tight MP’s effects.Originality/valueThere are three significant contributions of the paper. Firstly, it provides empirical evidence on the existing of BSC of MTM using firm-level panel data spanning over 43 years for an emerging and small economy, namely Pakistan. Secondly, it examines the moderating role of FSD and FAge in formulating the effects of MP. Finally, it presents the total impact of MP at different percentiles of FSD and FAge, which definitely broadens the understanding of MTM through indirect channels.

Small sums, big impact: Corruption and microfinance institutions

Microfinance institutions (MFIs) have been promoted worldwide as developmental platforms that can help eliminate some of the major global challenges such as poverty and economic development. The effectiveness of using MFIs to fulfil such expectations depends on their performance, which can be affected by a range of institutional factors such as corruption, rule of law and financial sector development. However, there is a lack of clarity on whether these factors are performance inhibitors or promoters. Using gender as a mediating factor, this study develops and tests these relationships on MFI performance, with the aim of contributing to research on institutions and corruption in the Global South. Drawing on the MFI performance model, the study uses data on MFIs operating in 33 African countries. The results reveal that the control of corruption reduces MFIs’ operating expenditure, while it increases MFIs’ operating income. Drawing from the essentialist perspective of the theory of social construction of gender, it is argued that female borrowers from MFIs are shown to have a mediating impact on the relationship between the variables tested (such as control of corruption) and MFI performance. The study also has public policy relevance for nations seeking to use MFIs as means of fostering entrepreneurship and economic development.

Economic growth through digitalization in Africa: does financial sector development play a mediating role?

PurposeThis paper aims to analyse economic growth in Africa focussing on the role of digitalization and financial sector development.Design/methodology/approachThe authors employ country-level data from 36 African countries over the period 2000–2020 and used fixed effect, random effect and the Hausman–Taylor estimation techniques.FindingsThe study, first finds that, digitalization propels financial sector development in Africa. Building on this, the study further finds that, digitalization conditioned on financial sector development at best does not promote economic growth in Africa. However, results of the net effects suggest that digitalization, overall, improve economic growth in Africa.Social implicationsIn the current environment of a sluggish global economy, digitalization can play an important role in assisting policymakers to spur economic growth. This has attracted the attention of many researchers in the developed world. However, little is done about the subject matter in Africa.Originality/valueThe findings of this paper are novel in the African sub-region with important policy implications.

Does FDI have differential impacts on exports? Evidence from developing countries

Theoretical literature indicates that foreign direct investment (FDI) inflows can, directly and indirectly, promote exports by augmentation of domestic capital, technological and knowledge-based spillovers, improvements in competitiveness, and strengthening export channels. However, empirical studies have shown that the benefits of FDI for exports may not be automatic and could vary according to the characteristics of the recipient country. Accordingly, the objective of the current study is to understand the implications of foreign investment for exports of 93 developing countries during 2000–2017 using panel data analysis. It also distinguishes between different types of developing countries – dividing the sample into lower-income countries (LICs), lower and middle-income countries (LMICs), and emerging countries – to study the differential effects of FDI for these different country groups. The study finds that FDI complements exports, and the complementary effect is contingent upon the development levels of the host country. FDI is most effective for promoting exports for emerging countries and least effective for LICs. Accordingly, the study advocates for well-designed policies that prioritize channeling FDI to strategic sectors and push for improvements in the quality of human capital, financial markets, and infrastructure. • The study examines the differential impact of FDI on exports for low-income countries (LICs), lower middle-income countries (LMICs) and emerging countries (93 countries in Total). • Unlike other studies, we develop composite indices of infrastructure development and financial sector development using principal component analysis for each country by taking multiple indicators. • The results reveal that beneficial impact FDI on exports varies across different country groups and the export impact is contingent upon the absorptive capacities of developing countries. • The absorptive capabilities such as infrastructure, financial sector development, trade openness, stock of human capital, institutional set up and external sector stability matter the most for the positive exports impact of FDI.

INSTITUTIONAL QUALITY, FINANCIAL INCLUSION AND SHADOW ECONOMY IN NIGERIA (1991-2020): AN ARDL APPROACH

 The study examined the dynamic link between institutional quality, financial inclusion and the informal economy in Nigeria. These were with the view to examining the institutional influence of financial inclusion on the development of informal economy. Annual data covering the period 1991 to 2020 were used for the study. The study made use of Autoregressive Distributed Lag (ARDL) as the technique of estimation. The study found a long run association between the variables and also reveal that financial inclusion and institutional quality directly has a negative but significant effect on shadow economy in Nigeria. This reveals that the development of financial sector as well as quality institutions aids formal sector participation as against the informal sector thus a decrease in shadow economy size in Nigeria. The effect of the interaction of financial inclusion and quality of institution on shadow economy is also found to be positive and significant meaning that weak institution quality has its toll effect on financial inclusion and which result to growth in informal economy in Nigeria. The study concludes that quality of institution in Nigeria is weak and must be improved to favorably promote financial inclusion and successfully mitigate the effect of shadow economy in Nigeria.           Therefore, reforms and policies that are required to improve transparency and accountability at all levels of governance as well as improvement in financial system are hereby recommended for policy makers.

Fiscal Crises: The Role of the Public Debt Investor Base and Domestic Financial Markets as Aggravating and Mitigating Factors

The paper evaluates the key drivers of fiscal crises in a sample of countries from all three income groups—advanced, emerging, and low-income countries, using fiscal crisis data recently developed by the IMF’s Fiscal Affairs Department. The empirical study focuses on three questions: (1) How does the composition of debtholders (domestic vs. foreign, resident vs. non-resident, or official vs. non-official) affect the probability of a fiscal crisis, after controlling for the level of public debt and other relevant variables?; (2) How does the development and size of the domestic financial sector affect the probability of a fiscal crisis?; and (3) How do changes in the debt level affect the probability of a fiscal crisis, for given compositions of the sovereign debt investor base and different levels of development and size of domestic financial markets? Our findings confirm the benefits of financial development, the danger of heavy reliance on a non-resident investor base, and also that emerging market economies have a lower debt carrying capacity compared to the full sample.

Does proximity matter? The effect of financial sector development on economic growth in the EAC and SADC regional blocs

This study examines the finance-growth nexus among countries in the Southern African Development Community and East Africa Community regional blocs. We aim to see if small economies can rely on expansionary monetary policies to stimulate economic growth given the illusive nature of such policies. The panel error correction model is applied to analyze the aggregated data, which were obtained from the World Development Indicators and the Comité Européen d'Etudes des Polyphosphates. The results indicate that proximity to trading giants jeopardizes the freedom to use monetary expansionary policies among relatively small countries. If such policies are adopted, it will be a significant impact on countries located in regions where trading powers are evenly distributed.

Foreign Direct Investment and Inclusive Growth: The Role of the Financial Sector Development

This study examined the role of the domestic financial sector development in the relationship between foreign direct investment (FDI) inflows and inclusive growth in Nigeria over the period, 1981-2020 using annual time series. Analytically, the study employed the autoregressive distributed lag approach of cointegration. The bound test result shows that there is a long-run relationship between inclusive growth and financial sector development, as well as the other underlying variables. Empirically, the result reveals that the FDI exerted a significant positive effect on inclusive growth when the domestic financial sector has reached a certain minimum level of development. The result further shows that the FDI alone has a significant negative effect on inclusive growth. This means that FDI alone does not necessarily increase the well-being of the people, except when a certain minimum level of financial sector development is attained. This is evidence that the domestic financial sector development is a pre-condition for FDI to effectively promote inclusive growth in Nigeria. Therefore, the study recommends that the development of the domestic absorptive capacity-financial sector development should be extended by promoting reforms that will translate FDI inflow into inclusive growth.

Environmental feasibility of a gradual shift from fossil fuels to renewable energy in India: Evidence from multiple structural breaks cointegration

The prime purpose of this study is to empirically explore the comparative environmental impact of renewable and non renewable energy consumption in India. The study also investigates the impact of increasing levels of national income and development of financial sector on environmental quality and applicability of “Pollution Haven Hypothesis” in the country. Multiple structural breaks based [1] cointegration test has been applied to investigate the presence of cointegrating relationship among the variables. Modified Autoregressive Distributed Lag Bounds test has been applied to ascertain cointegration. The empirical results confirmed presence of cointegration with three structural breaks. The long run results revealed that renewable energy consumption has no direct mitigating impact on emission of greenhouse gases, however, a shift from conventional to renewable sources of energy may help the natural environment by lessening the hampering effect of fossil fuels on environment. Hence, India faces a dual challenge of achieving maximum possible growth of national output and simultaneously addressing the rising threat of global warming and climate change. The authors suggest policymakers to take necessary steps for attracting foreign investment in clean energy, providing fiscal and financial incentives for undertaking renewable energy projects and eliminating subsidies to fossil fuels.

Study of Business Models of E-Commerce in Rural Areas of Vidarbha Region

Information Technology has been playing a vital role in the future development of financial sectors and the way of doing business in an emerging economy like Bangladesh. Increased use of smart mobile services and internet as a new distribution channel for business transactions and international trading requires more attention towards e-commerce security for reducing the fraudulent activities. The advancement of Information and Communication technology has brought a lot of changes in all spheres of daily life of human being. Ecommerce has a lot of benefits which add value to customer’s satisfaction in terms of customer convenience in any place and enables the company to gain more competitive advantage over the other competitors. This study predicts some challenges in an emerging economy.

Financial Inclusion, Fintech, and Income Inequality in Africa

Financial inclusion and Fintech have revolutionized the financial sector and fundamentally changed how we store, save, borrow, transfer, and invest money. This paper investigates the impact of financial inclusion and Fintech on income inequality using waves of survey data for 2011, 2014, and 2017 across 39 African countries. By using pooled ordinary least square and two-stage least square (2sls) estimation methods, we obtain three key findings. First, institutional factors such as political stability, control of corruption, and government effectiveness determine Fintech and financial inclusion. Second, Fintech encourages individuals to have a formal bank account, thereby promoting financial inclusion. Third, financial inclusion and Fintech exacerbate income inequality. The direct implication of our findings is that policymakers make tradeoffs whether they seek to achieve higher inclusion and Fintech or to reduce income inequality. We highlight that a pro-poor financial sector development is vital. Easing the bottleneck in obtaining loans, offering agriculture-based Fintech services, and improving digital literacy are important steps to gain the most out of inclusion and Fintech in reducing income inequality.

Financial Sector Development and Energy Consumption in Sub-Saharan Africa: Does Institutional Governance Matter? Dynamic Panel Data Analysis

The failure of energy economists and planners to comprehend the dynamics and paradigm shift in the finance and institutional quality domain that drive energy use is blamed for the ongoing energy consumption concerns. Consequently, this study revisits and contributes to repositories by examining the relationship between finance-renewable energy consumption and institution-renewable energy consumption. The research question raised is: Do governance indicators moderate the impact of finance on renewable energy consumption? With panel dataset of 46 countries in sub-Saharan Africa spanning from 2010 to 2020 and using political stability, voice and accountability, government effectiveness, and regulatory quality indicators of governance, the research output is as follows: (i) Financial development exerts a significant positive impact on renewable energy consumption and intensity, but the level of impact is weak (i.e., at a 10% level significant). (ii) The governance indicators significantly drag renewable energy consumption and intensity. (iii) The negative interaction between financial development and governance indicators is sufficient to worsen the weak relationship between finance and renewable energy in sub-Saharan Africa. (iv) Governance threshold eroded the weak positive effect of financial development on renewable energy consumption and intensity, leading to negative synergy effect in some cases, and (v) The net effect from the moderating impact of governance indicators on finance is significantly different across model specification. The study demonstrates the undeveloped nature of finance and institutional framework in sub-Saharan Africa, considering the weak association between the key variables.

The link between technological innovation and financial development: Evidence from selected OECD countries

AbstractFinancial development is a main goal for developing and developed countries. Therefore, this study aims to investigate the impact of technological innovation on financial development over the period 1990–2018 for 21 OECD countries. The study integrates economic growth, natural resources and financial globalisation into the financial development equation as other explanatory variables. To estimate the long‐run coefficients, the Driscoll‐Kraay standard errors, panel corrected standard errors and feasible generalised least squares estimators are applied. The Dumitrescu‐Hurlin bootstrap causality test is used to examine the causal linkages among the variables. It is found that there exists cointegration between the variables. It is also found that technological innovation, economic growth and financial globalisation positively affect financial development while natural resources decrease it in the long run. The findings reveal that technological innovation and financial development cause each other. The study will present some policy recommendations to accelerate financial sector development in OECD countries.

Natural resources led growth and the role of financial development: Evidence from Next-11 economies

The contradictory literature concerning the impact of natural resources (NR) on economic growth (GDP) nurtures a new debate among scholars and policy-makers to examine the real impact of NR on the economy's growth. Therefore, this study aimed to analyze the specific influence of NR rents indicators on GDP in the Next-11 economies from 1990 to 2020. This study also tends to explore financial development's role in GDP. This study uses advanced panel data approaches such as panel cross-section dependence, slope coefficient heterogeneity, and cointegration estimators to achieve the stated objective. These estimators asserted the slope heterogeneity, presence of cross-section dependence, and the validity of cointegration between the variables. The mixed integrating order of variables led to adopting the third generation econometric approach – cross-sectionally augmented autoregressive distributed lags (CS-ARDL). The estimated results asserted that NR heterogeneously affects GDP, where natural gas rents enhance GDP, while oil rents and forest rents adversely affect the growth of the concerned economies. Also, financial development is found to be a significant and positive factor in GDP in the region. The estimated results are found robust and consistent by utilizing the mean group (MG) and augmented mean group (AMG) estimators. Following the outcomes, this study suggests efficient exploitation and utilization of NR, increased investment in the renewables sector, and financial sector development achieve sustainable GDP.