Measures Of Financial Development Research Articles

Does FinTech penetration drive financial development? Evidence from panel analysis of emerging and developing economies

Recent innovations in digital financial technologies (FinTech) have called into question the role of FinTech in financial development. This study examines FinTech's direct and conditional effects on financial development using data from emerging and developing economies. Three measures of financial development (broad money, Private credit, and bank deposits) and two conditional factors (financial performance and financial inclusion) were investigated vis-à-vis FinTech penetration. This paper demonstrates that FinTech penetration not only drives financial development but also strongly impacts the financial development of countries with weak financial sector performance and low financial inclusion. These findings have several policy implications: (1) countries with weak financial sector performance could leverage FinTech to improve financial development, and (2) appropriate policies on FinTech development can drive digital financial inclusion, financial deepening, and consequently economic growth.

The effect of financial development on natural gas resource rent in Ghana

While a large body of literature presents evidence that the financial system of resource abundance countries is weak, much less is known about the effects of financial development on natural gas resource rent in developing countries like Ghana. I present the first study that examines the effects of financial development on gas resource rent. Using two different time series approaches, I find that financial development exerts a positive and significant effect on gas resource rent, implying that an efficient financial system or market promotes natural gas resource extraction. Specifically, the autoregressive distributed lag models (ARDL) estimates suggest that while net domestic credit per GDP and monetary sector credit to private sector per GDP exert a positive and significant effect on gas resource rent, both narrow money and broad money supply exert a positive but insignificant effect on gas resource rent. The sub-index of financial development created from principal component analysis (PCA) confirms the positive effect of financial development on gas resource rent, implying that financial development generally spurs gas resource rent. Also, Toda and Yamamoto (1995) causal estimates suggest that financial development has a strong and significant influence on gas resource rent and not vice versa, using different measures of financial development. These findings suggest that in addition to institutional and economic factors considered in the literature, financial development indicators such as net domestic credit and monetary sector credit to the private sector play an important role in natural gas resource extraction and thus should be a factor of interest when devising policies.

The great expansion: The exceptional spread of bank branches in interwar France

Using newly collected data at the city level between 1910 and 1938, this article shows that, after World War I, France experienced an unprecedented expansion in bank branches mostly due to the creation of temporary branches in rural areas. The banking crisis in early 1930s paused this expansion. Nevertheless, the number of bank branches per capita remained four times higher than before the war. Also, the expansion of bank branches was not associated with an increase in the ratio of bank assets to national income. These findings re-evaluate the Great Reversal hypothesis in banking and reveal the disconnection between geographical expansion of banks and standard measures of financial development. Both trends can be reconciled if one considers that banks are multi-product firms – not just lenders – and that competition for new customers is not always associated with greater credit activity.

The effect of Financial Development on Pro-Poor Growth: evidence from Sub-Saharan African Countries

ABSTRACT This paper extends the empirical analysis establishing the significant and positive/negative influence of finance on growth/poverty by examining the contribution of financial development to pro-poor growth. We investigate the relationship between financial development and pro-poor growth in a panel of 29 countries from sub-Saharan Africa over the period 1994–2019. We focus on the vast majority income as the main indicator of pro-poor growth. We use the recent financial development index as a measure of financial development. Using Pooled Mean Group-ARDL estimation in a dynamic heterogeneous panel framework, we obtain the following results: (i) from linear analysis, there is a positive and significant effect of financial access, financial efficiency and the overall financial development index on pro-poor growth in the short run, while in the long run, only financial efficiency affects negatively and significantly pro-poor growth; (ii) results show that the nonlinear relation is not verified in the short run, while in the long run, there is an inverted U-shaped relationship between the financial development index, financial access and financial depth and pro-poor growth. This suggests that too much finance can be detrimental to pro-poor growth in SSA. Financial inclusion of the poor combined with governance is necessary to improve pro-poor growth.

Political uncertainty and stock market liquidity, size, and transaction cost: The role of institutional quality

AbstractUsing panel data of 42 countries from 2001 to 2019, we examine whether political uncertainty (caused by uncertainty about national elections) explains variations in cross‐country liquidity, market size, and transaction cost. We also investigate whether institutional quality moderates the negative effects of political uncertainty on stock market development. We show that political uncertainty reduces stock market size, liquidity, and increases transaction costs. Our results indicate that institutional quality moderates the negative effects of political uncertainty on stock market development. However, we find no effects in emerging markets arising from the high prevalence of weak institutions. We confirm the robustness of our findings using alternative financial development measures and endogeneity. This study enhances our understanding of the salient role of political uncertainty in the development of the stock market, with important implications for market regulators, corporations, and investors.

Exploring the moderating role of financial development in environmental Kuznets curve for South Africa: fresh evidence from the novel dynamic ARDL simulations approach

The extant literature has produced mixed evidence on the relationship between financial development and ecological sustainability. This work addresses this conundrum by investigating financial development’s direct and indirect consequences on ecological quality utilizing the environmental Kuznets curve (EKC) methodological approach. Our empirical analysis is based on the novel dynamic autoregressive distributed lag simulations approach for South Africa between 1960 and 2020. The results, which used five distinct financial development measures, demonstrate that financial development boosts ecological integrity and environmental sustainability over the long and short terms. In the instance of South Africa, we additionally confirm the validity of the EKC theory. More importantly, the outcomes of the indirect channels demonstrate that financial development increases energy usage’s role in causing pollution while attenuating the detrimental impacts of economic growth, trade openness, and foreign direct investment on ecological quality. Moreover, the presence of an inadequate financial system is a requirement for the basis of the pollution haven hypothesis (PHH), which we examine using trade openness and foreign direct investment variables. PHH for both of these variables disappears when financial development crosses specified thresholds. Finally, industrial value addition destroys ecological quality while technological innovation enhances it. This research provides some crucial policy recommendations and fresh perspectives for South Africa as it develops national initiatives to support ecological sustainability and reach its net zero emissions goal.

Financial Development and Language Structures

Using cross country data, we explore the role of linguistic structures for the financial development of countries. Specially, we investigate if future time reference (FTR), the requirement of an obligatory future tense marking in languages, matters for financial development or not. Our results show that countries speaking weak FTR language or a language not needing a dedicated future tense marking have enhanced financial development relative to countries speaking strong FTR language. Discounting the future less or having a connection between the present and the future—characteristics of weak FTR languages—has implications for caring about saving and investment, having efficient property rights, protection of shareholders and cost of acquiring information. Our results are robust to multiple measures of financial development and inclusion of determinants of the same. Finally, results show that weak FTR language speaking countries benefit more when their financial development is low.

Friends or foe? The complementarity or substitutability of financial development and FDI, financial development, and trade openness on domestic investment

ABSTRACT This paper examines the relationship between financial development and FDI and between financial development and trade openness in boosting domestic investment. Initially, this paper examined this issue for panel data sample of 161 countries over 1995–2018. Considering the issue of aggregation bias due to heterogeneous nature of countries in the sample, this complementarity or substitutability effect between financial development and FDI as well as financial development and trade openness have further been re-examined by using 129 developing country samples. Using panel fixed effects (FE) and two-step system GMM estimation technique, the empirical results demonstrate the substitutability between financial development and FDI as well as a substitutability relationship between financial development and trade openness in driving domestic investment. The results hold for both the samples and also in alternative measures of financial development and extended specifications.

Financial development and educational quality in Sub-Saharan Africa

This paper examines the effect of financial development on educational quality in Sub-Saharan Africa. This paper also analyses the interaction effect of public education financing and measures of financial development on quality of education in Sub-Saharan Africa. The study adopts the two—step system generalised method of moment (Two-Step System GMM) model in estimating the effect of financial development on educational quality and the interaction effect of financial development and public education financing on educational quality. We use data for the period 1990 to 2019 for 42 Sub-Saharan African countries obtained largely from the World Development Indicators of the World Bank and the International Monetary Fund (IMF) financial development index database. The results show that overall financial development, financial access, financial depth, and financial efficiency improve quality at the primary, secondary, and tertiary levels of education. We also find that public education financing improves quality at all levels of education. The results also show that public education financing positively moderates the nexus between measures of financial development and educational quality in Sub-Saharan Africa.

Does financial development has (a)symmetric effect on environmental quality: insights from South Africa

PurposeThis paper investigates the (a)symmetric effects of financial development in the presence of economic growth, energy consumption, urbanization and foreign direct investment on environmental quality of South Africa between 1980 and 2017.Design/methodology/approachA robust measure of financial development is generated using banking institutions and non-banking institutions market-based financial development indicators, while environmental quality is measured using carbon footprint, non-carbon footprint and ecological footprint. The objectives of the study are captured using linear and non-linear autoregressive distributed lag.FindingsThe result from the symmetric analysis suggests that financial development stimulates carbon footprint and ecological footprint in the short run; however, financial development abates non-carbon footprint. In the long run, financial development has a significant negative effect on carbon footprint and ecological footprint. However, the asymmetric analysis established strong asymmetric effect in the short run, while no asymmetric effect is found in the long run. The short run asymmetric analysis reveals that positive shock in financial development increases carbon footprint and ecological footprint; however, positive changes in financial development reduce non-carbon footprint. Negative shocks in financial development, on the other hand, have a positive impact carbon footprint, non-carbon footprint and ecological footprint.Practical implicationsThe study's outcome implies that the concept of “more finance, more growth” could also be applied to “more finance, better environment” in South Africa. The study offers vital policy suggestions for the realization of sustainable development in South Africa.Originality/valueThis empiric adds to the body of knowledge on the influence of financial development on various components of environmental quality (carbon footprint, non-carbon footprint and ecological footprint) in South Africa.

Dynamic effects of financial development on economic activity

ABSTRACT In this article, we provide evidence of the dynamic effects of financial development on a group of key macroeconomic variables, namely, output, consumption, investment, inflation, money, the interest rate and the exchange rate. As the measure of financial development we use a new broad measure of financial development instead of the narrow measures usually employed in the related literature. Another novelty is that we estimate the dynamic effects of financial development on economic activity in the context of a panel vector autoregressive model, comprising 36 countries observed in the period 1983–2019. Our results suggest that financial development has a positive impact on output, investment, and consumption. The results reported in this article also support the proposition that the benefits from financial development are larger in economies where the financial system is market-based. These results survive a battery of robustness checks.

The impact of financial development on ecological footprints of nations

Financial development is an important driver of technological progress in economic development. Its role in environmental change has not been well examined. We endeavor to examine the non-linear effects of multi-dimensional financial development measures on four kinds of ecological footprints in a global sample of 124 economies. We apply a two-step system generalized method of moments to deal with possible endogeneity. We find a stark difference in the impact of financial institutions' development and financial markets' development on the ecological footprints. Whereas financial institutions, with their three dimensions (i.e., depth, access, and efficiency) have an inverted-U shaped relationship with the ecological footprints, allowing for the initially harmful effect on the environment to revert to beneficial effects, the same results are not observed for financial markets. We attribute the inverse-U shaped relationship to a declining scale effect of FD and rising technological and composition effects of FD that transform the economy. Based on that we recommend that best practices of financial institutions regarding making environmentally conscious investment decisions be turned into a conscious investing culture around the world. For this to become a reality, better information-sharing regarding the individual environmental performance of firms will be needed.

Beyond financial deepening: Rethinking the finance-growth relationship in an uneven world

Following the debate on the limits to financial deepening, we re-assess the finance-growth relationship employing a broad-based measure of financial development and controlling for the stability-enabling features of financial environments. We show that the marginal effect of financial development on growth differs for economies with uneven long-run growth patterns. We first identify endogenously multiple convergence clubs for a large panel of countries over 1995–2017; then, based on ordered logit estimations, we show that the probability of approaching a higher growth path, when the level of financial development is raised, depends on economies’ initial income, availability of skills, and institutions. Finally, running panel regressions we find that the marginal effect of financial development on growth is negative for high-income financially mature economies, positive for follower economies, insignificant for countries in low-growth traps. Overall, financial development spurs growth when economies take steps to enhance the inclusiveness, efficiency, and resilience of financial systems.

Financial Development and Economic Growth Nexus in the South Mediterranean Countries (SMCs)

This article investigates the presence of asymmetries in the short- and long-run relationships between financial development and economic growth covering four SMCs from 1984 to 2017 by applying the nonlinear ARDL. We factored three financial development measures that detected the financial depth and the credit to private sector taken one by one and together in four models. The empirical evidence provides significant evidence of both short-run and long-run asymmetries between the interest variables. The main conclusion drown from this paper is that in the event that policymakers place more emphasis on policies that develop financial depth and credit for private sector, a concomitant effect would positively impact long-run growth in Algeria, Egypt, Morocco and Tunisia.

Financial development and income inequality: A meta‐analysis

AbstractThe voluminous empirical research on the effect of financial development on income inequality has yielded mixed results. In this paper, we collect 2127 estimates reported in 116 published studies that investigate the effect of financial development on income inequality. Although our initial tests for publication bias (which do not account for moderator variables) show that the current literature does not suffer from publication selectivity, once we control for a set of moderator variables, we find evidence of mild publication bias in favor of positive estimates (i.e., the current literature favors the publication of studies that find that financial development increases income inequality). In addition, our results suggest that the overall effect of financial development on income inequality is on average zero, but that its sign and magnitude depend systematically on various study characteristics. The characteristics of data and estimation methods, whether endogeneity is taken into account, the different measures of financial development and the inclusion of financial openness, inflation and income variables in the regressions matter significantly for the effect of financial development on inequality.

The impact of financial systems on economic growth in European Union member countries

Abstract As the economy develops, self-financed capital investments are less frequent, being replaced by financing through banking intermediation and later through capital markets. The development of financial systems has a positive effect on the mobilization of resources, improving corporate governance and risk management, leading to economic growth. The preponderance of previous research papers shows a positive relationship between financial development and economic growth. Studies using cross-sectional methodologies discover almost unanimously a positive link between financial development and economic growth, while studies with methodologies based on time series, panel data or case studies reach different conclusions depending on the period considered, the countries’ initial level of development and the structure of the financial systems. The purpose of this paper is to investigate the impact of financial systems on economic growth using panel regressions based on annual data regarding measures of financial development for the member countries of the European Union, for the period 1990-2020. The findings show that the development of the financial systems, through the activity of banks and capital markets, has a positive effect on the allocation of resources, the mobilization of savings and the efficient management of risks, leading in turn to economic growth if there is a correlation between the funds invested and the output of the real sector. The paper’s contribution to the field refers to the study of the long-term relations between the financial systems and the economic growth using data for all European Union countries, the findings helping to formulate public policies.

The Relationship among Domestic Credit, Financial Development and Economic Growth in the Gambia

This study examines the relationship among domestic credit availability to the private sector, financial development and economic growth in the Gambia from 1967 to 2020. Financial development has been a crucial driver of economic growth by channelling funds from those with financial resources, who lack the business investment ideas to those with investment decisions but lack the resources to kick start their investment ideas. The development of this sector will not only promote economic growth but will create confidence for lenders in providing funds to investors and these funds will be monitored to ensure they’re used in productive projects to prevent defaults and financial crises. The study employed a VAR analysis to examine the relationship among these variables. However, given the lack of data on financial development, the ratio of broad money to GDP and the ratio of domestic credit to the private sector to GDP was used as a measure of financial development. The result shows that financial development has a direct impact on the changing amount of domestic credit available for the private sector. Although the availability of domestic credit to the private sector has little impact on economic growth, this seemingly small impact will significantly improve further economic growth in the Gambia. Therefore, policymakers should put more effort into developing and improving the credibility of the financial sectors in the Gambia which will create confidence in lenders and thus monitor the activities of credit borrowers if those credits are used productively.

Is the impact of financial development on energy consumption in Jamaica asymmetric?

PurposeThe purpose of this study is to determine whether causal asymmetries exist between energy consumption and three dimensions of financial development in Jamaica.Design/methodology/approachThe authors use the non-linear autoregressive distributed lag method to identify the long- and short-run associations between energy consumption and different measures of financial development in Jamaica for the period 1980 to 2018.FindingsThere are two central findings. First, cointegrating relationships run from the dimensions of financial development to energy consumption. Second, the authors find asymmetries in these relationships. In the long run, asymmetries are such that rising levels of financial development have a neutral impact on energy consumption. By contrast, falling levels of financial development in the long run are associated with increases in energy consumption. In the short run, the authors find evidence of asymmetries only in changes in the overall level of financial development on energy consumption.Practical implicationsOne practical implication is that for Jamaica to avoid some of the potential negative environmental consequences resulting from the positive impact on energy consumption arising from falling levels of financial development, a strong financial development policy will be important.Social implicationsThere will be positive social impacts from financial development in the area of climate finance.Originality/valueTo the authors’ knowledge, this is the first study on Jamaica that examines the financial development–energy nexus. Further, the authors use relatively new and comprehensive measures of financial development.

Remittance and financial development in Africa: A multidimensional analysis

Previous studies on the nexus between remittances and financial system development are less informative due to their failure to investigate how remittance inflows affect different aspects of the financial sector in Africa. In the study, we re-investigate the impact of the remittances on the African financial system in twenty-seven (27) countries for 1980-2017 using the Augmented Mean Group (AGM) estimating technique. The results show that remittance does not have any significant impact on different dimensions of financial development in Africa. This finding is robust to alternative estimating techniques. This implies that remittance inflow is not a major driver of financial development in African countries. The outcomes of this study show that it is important to go beyond the use of conventional measures of financial development and focus more on multidimensional aspects of the sector such as access and efficiency of both the financial institutions and financial markets. It is also worth noting that remittance inflows in African regions are under-documented due to the high level of the shadow economy. The study suggests that the African government should formulate policies encouraging African migrants to pass through formal channels when remitting for the benefits of the financial sector and the economy in general. The policy should also encourage remittance savings and their utilisation in the African productive sector.

Does Financial Development Increase Education Level? Empirical Evidence from Sub-Saharan Africa

This study analyzes the effect of financial development on education in a sample of 37 sub-Saharan African countries with data covering the period from 2000 to 2018. We use the nine measures of financial development proposed by the International Monetary Fund (IMF) and the three levels of education, including primary, secondary, and tertiary education. Applying the two-stage system Generalized Method of Moment (GMM), we find that financial development increases school enrollment in each level in sub-Saharan Africa. The gender results also show that financial development improves primary and secondary education for both male and female, except at the tertiary level where the effect does not appear to be robust for male. Based on these results, we suggest that the financial market and financial institution in SSA should be improved given its beneficial effects on the education system.