Financial depth-economic growth nexus: Implications for the Ukrainian banking sector

Abstract

The relevance of this study is warranted by changes in the modern understanding of the interrelation between economic growth and financial depth. While earlier studies consider it to be universally positive, newer ones tend to challenge both nature and direction of such a relationship. This paper aims to investigate the nature of the financial depth-economic growth nexus in Ukraine during 2008–2019 based on data provided by the State Statistics Committee of Ukraine and the National Bank of Ukraine, using the standard OLS regression. The resulting model with an adjusted R squared of 0,96 confirms a strong (within a 90% confidence interval) linear relationship between real GDP per capita, denominated in local currency, which was used as a proxy for economic growth, and financial depth, which was assessed using three indicators: the share of bank loans to non-financial institutions in real GDP, the share of non-bank loans to non-financial institutions in real GDP, and the share of stock market capitalization in real GDP. Both bank and non-bank loans to real GDP ratios have a negative impact on economic growth (UAH 2,154 and UAH 78,154 decline per 1% growth, respectively), while market capitalization provides a positive influence (UAH 1,641,130 growth per 1% growth). This implies that, despite concentrating the majority of the resources available to the Ukrainian financial sector, the banking sector does not contribute to its economic growth. This can be alleviated by imposing additional restrictions on the amount of government securities allowed in a bank’s capital structure. AcknowledgmentsThe paper was funded as a part of the “Relationship between financial depth and economic growth in Ukraine” research project (No. 0121U110766), conducted at the State Institution “Institute for Economics and Forecasting of the NAS of Ukraine”.

Banking Depth and Economic Growth of South Asian Countries

“…With financial development variables: broad money, bank credit, liquid liabilities, financial system deposit to GDP and macroeconomic variables (government consumption, investment, trade terms, life expectancy, schooling, democratization index, rule of law index, Grundler and Weitzel (2013) employed GMM model and found the significant negative impact in developed countries, whereas, positive significant impact on developing economies. Kerimov (2021) found negative significant relation between FD (bank and non-bank loans to non-financial corporations, grain export) and GDP in Ukraine. Estrada, Park and Ramayandi (2010) evident the reduced contribution of financial depth on GDP per capita, however, there is a need to develop financial system as a whole rather than developing…”

“…There are different proxies for measuring GDP growth such as: GDP growth rate, GDP per capita, GNI, GDP constant at LCU, etc. Eryilmaz, et al (2015); Kerimov (2021); Ahmed and Ansari (1999) have used GDP per capita growth as dependent variable. So, based on these, GDP per capita growth is taken as suitable proxy of economic growth measurement.…”

Peculiarities of Digitalization of Financial Services Among Countries by Income Groups: Conclusions for Ukraine

“…2. Financial deepening as a resulting element of simplifying access and the possibility of prompt use/conversion of money into various liquid forms (Kerimov, 2021). Vol.…”

Financial depth-economic growth nexus in Ukraine

“…The historical vector of the nexus between financial depth and economic growth seems evident because the progressive movement of financial and commodity markets goes sideby-side. However, this fact does not indicate the mechanical nature of financial and economic processes [9,[130][131][132][133]. Otherwise, the central bank emission activity could guarantee sustainable economic growth, and any increase in monetary aggregates could assure industrial growth.…”

“…It is not surprising that in this analysis, special attention is paid to the study of the simultaneous dynamics of real GDP and financial/monetary aggregates (money supply, loans granted, stock market volume, etc.) as a percentage of nominal GDP [9,[130][131][132][133].…”