Bank Competition and Economic Growth

Abstract

This paper provides rather scares evidence on the nexus between bank competition and economic growth in a unique developing economy; Sri Lanka for the period 1996-2018. The effect of competition in the Sri Lankan banking sector on economic growth, and the mechanisms through which competition affects growth are analyzed in the present paper. The VEC model used in this study was aimed at capturing independently the short and long-term effect of bank competition on economic growth. The competition is measured with Pazar-Ross H- Statistics. Contrary to the common wisdom, the study found evidence for negative effects of bank competition, on economic growth in the short run. However, in the long run, this effect is strong and positive. Further, the statistical results of this paper revealed that higher bank competition channels economic growth through interest rate and bank efficiency. These findings have important policy implications as it gives great insight into the complexity of competition related conduct in developing countries.

Examining the Effect of Economic Collison

“…Banks play an important role in the economy; thus, creating competition between the banking sector becomes crucial (Liyanagamage, 2021). Based on (Levine, 2005), the banking sector gives five features that may support economic growth; by (i) providing ex-ante records on funding possibilities and capital allocation, (ii) supervising investment and encouraging government companies after supplying credit, (iii) facilitating trade, threat diversification, and risk management, (iv) mobilizing and gathering deposits, and (v) helping along the exchange of goods and services.…”