Effect Of Financial Sector Development Research Articles

Channels of financial sector development and rural-urban consumption inequality in India

Purpose The purpose of this paper is to examine the direct (microcredit), medium-direct (bank credit), and indirect (through economic growth) effect of financial sector development (FSD) on rural-urban consumption inequality (RUCI) in India using state-wise annual data from 1999-2000 to 2011-2012. Design/methodology/approach A panel data analysis for a sample of 15 major Indian states using the generalized method of moments estimators provides an empirical evidence for the direct (microcredit), medium-direct (bank credit), and indirect (economic growth) effect of FSD on RUCI. Findings FSD is pro-urban in India resulting in a declining rural-urban consumption ratio (RUCR) and increasing RUCI. The negative effect of FSD on RUCR is greatest through the medium-direct channel followed by the indirect and direct channels. Research limitations/implications The study questions the social banking initiatives of the government in rural areas where more than 80 percent of the poor reside. There is a need for restructuring financial inclusion programs with a shift in their focus on rural areas and an improved mechanism to target the poor. Originality/value The paper proposes that formal financial services by banks are primarily availed by non-poor and urban population and hence acts as a medium-direct channel whereas the semi-formal financial services by microfinance institutions specifically target the rural poor and act as a direct channel to affect the poor. It is the first ever study to use state-wise data on microcredit disbursed under Self-help Group Bank Linkage Program to assess the direct impact of FSD on RUCI.

Finance and growth in oil‐dependent economies: does crude oil price matter? evidence from Nigeria

AbstractThis study examines three possible causal relationships between financial sector development, economic growth and crude oil price in Nigeria using the Autoregressive Distributed Lag (ARDL) approach to cointegration analysis over the period 1981 to 2011. First, the causal effect of financial sector development on economic growth is found to be negatively insignificant in the long‐run and negatively significant in the short‐run suggesting the weakness of financial intermediary sector in resource mobilisation and allocation in Nigeria. Crude oil price is found to be the key driver of economic growth in Nigeria. Second, the causal effect of economic growth on financial sector development is as well found to be negatively insignificant in the long‐run and negatively significant in the short‐run. Third, the causal effect of crude oil price on financial sector development is found to be positive and significant in the long‐run, suggesting that crude oil price is the underlying factor that determines the amount of economic activities passing through the Nigerian financial sector. The results highlight the need for a well‐articulated policy framework that will lessen the high dependence of the Nigerian economy on crude oil.

An Empirical Investigation into the Effect of Financial Sector Development on Consumption and Inflation in Nigeria: 1986-2012

Private consumption expenditure is one of the largest components of aggregate expenditure in Nigeria. It constitutes about 72% of GDP over the period understudy. It is therefore an important aspect of the macro-economy of any nation. In the same vein inflation has been a persistent evil affecting the economy of Nigeria. So they are both required to have a deep understanding of how macro-economy functions. The determinants of these two aggregates can therefore not be divorced from the activities in the financial sector. Hinging on the Keynesian absolute income consumption hypothesis, the paper used 3 SLS to estimate the two macroeconomic equations. The results showed that money supply, market capitalization and exchange rate had positive impact on personal consumption expenditure. However, it is only market capitalization that is not statistically significant. All the financial variables used—money supply, interest rate and exchange rate had positive relationship with the general price level. However it was only exchange rate that was not statistically significant. The paper concluded that shocks in the financial sector explained the variations in personal consumption and inflation. It was therefore recommended that interest rate and exchange rate should not be absolutely left to the dictate of the market forces. Government should intervene occasionally as the case may demand. Conducive environment that will make activities in the capital market should be encouraged.

An Assessment of the Effect of Financial Sector Development on Growth and Unemployment in Nigeria: 1986-2012

Parts of the major macroeconomic objectives of any nation are attaining high growth and employment rates. However these constitute major challenges in Nigeria as economic growth has either remained stunted or stagnant and unemployment rate very high. The financial sector is expected to push up the real sector thereby lowering unemployment rate. It is within this supply leading hypothesis that this work is situated. The 3 Stage Least Square method was used in estimating the Growth and Unemployment macroeconomic equations. The results showed that interest rate and exchange rate have effects on growth but only exchange rate was statistically significant. This seems to suggest that there is a disconnection between the Nigerian money market and the real sector. However interest rate and exchange rate were significant in influencing the rate of unemployment in Nigeria. The goodness of fits for each of the two equations was high. The simulation results showed that the shock in the financial sector has serious implications for the economic growth and unemployment. The work therefore suggests that interest rate and exchange rate should not be left absolutely to the dictate of the market forces. Occasionally government should intervene in these markets as the time requires.

Domestic Market Integration in China: The Role of the Financial Sector

Market integration in China has attracted substantial public attention, but little is known about the role that the financial sector plays in this process. This article is the first to empirically examine the effect of financial sector development on spatial market integration in China. Moreover, it explores the differential impacts of financial sector development across regions. Surprisingly, our results show that the development of the financial sector undermines spatial market integration in China due to local protectionism and strategic behavior. Further, the effects of various factors on market integration differ between economically developed and undeveloped areas.

Financial development and economic growth: an empirical evidence from the GCC countries using static and dynamic panel data

This paper contributes to the existing empirics of finance-growth nexus of all GCC countries with new results based on a larger dataset and longer time period 1975–2012, incorporating additional control variables, FDI, interaction term of FDI & financial development variables, and oil production. We employed four estimation techniques, Pooled OLS, Fixed effect estimation, Random effect estimation, and the system GMM estimation and used static and dynamic panel data. We obtain a robust finding of consistently a positive effect of financial sector development (FSD) on economic growth of GCC region with implication that a substantial improvement in FSD was in place. The results indicate that FDI, Fixed capital formation and oil production contribute positively to the economic growth of this region. The study results signify for a continuity of the on-going financial reform process, supervision & monitoring exercises to bring hitherto more dividends to the GCC economies.

Impact of Development and Efficiency of Financial Sector on Economic Growth: Empirical Evidence from Developing Countries

This paper analyses the impact of development and efficiency of financial sector on economic growth of a group of selected developing countries using a cross-country data averaged over the period 2005-2009. The results show that the impact of financial sector efficiency on economic growth is significantly positive for developing countries. For a sample of 50 developing countries the effect of financial sector development and financial sector efficiency is positive and highly significant. The sensitivity analysis also shows that the relationship remain positive and significant no matter what combination of the omitted variables are used in the basic model. Thus, our findings support the core idea that development and efficiency of financial sector stimulates economic growth.

Finanse a długookresowy wzrost gospodarczy – rola instytucji formalnych i nieformalnych

The paper aims to empirically analyze the effect of the quality of the formal institutional environment and social capital on financial development and long-run economic growth for a sample of developed and developing countries using the Generalized Method of Moments (GMM) for the period spanning from 1980 to 2009. The author sets out to find out if there is a synergetic effect between financial sector development and: first, formal institutional aspects measured by the institutional environment quality index, second, informal institutional aspects measured by the level of social capital in society. The article examines if the qualities of formal institutions as well as the level of confidence and cooperation between individuals are important to promoting financial sector and consequently long-run economic growth. The main results of the model are that (i) the development of formal institutions with a higher level of general institutional quality has a positive impact on long-run economic performance through the development of financial markets; (ii) the effect of financial sector development on long-run economic growth also depends on the state of informal institutions with a higher level of trust between individuals.

Migration and Remittances: Causes and Linkages

The authors empirically examine the determinants of remittance flows at the cross-country level. They consider, among other things, the significance of the level of migration, the education level of migrants, and financial sector development in determining remittances. Given the potential endogeneity problems, the migration and financial development variables are instrumented in the estimation. They find that the migration level is the main driver of remittance flows, even after controlling for the endogeneity bias through instrumental variable estimation. The authors also find that the education level of migrants relative to the population in home countries, the size of the economy, and the level of economic development of recipient countries adversely affect remittance flows. While they find the effect of financial sector development to be positive, its significance is not strongly supported in their analysis.

Financial Development and Economic Growth in Underdeveloped Countries

Publisher Summary This chapter discusses the financial development and economic growth in underdeveloped countries. An observed characteristic of the process of economic development over time, in a market-oriented economy using the price mechanism to allocate resources, is an increase in the number and variety of financial institutions and a substantial rise in the proportion not only of money but also of the total of all financial assets relative to GNP and to tangible wealth. Typical statements indicate that the financial system somehow accommodates—or, to the extent that it malfunctions, it restricts—growth of real per capita output. Such an approach places emphasis on the demand side for financial services; as the economy grows it generates additional and new demands for these services, which bring about a supply response in the growth of the financial system. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.