Institutions, Banking Development, and Economic Growth

Abstract

Does the institutional environment affect the causal relationship between banking development and economic growth? In the theoretical section of this paper, we develop an endogenous growth model where the institutional environment is captured through two indicators: judicial system efficiency and easiness of informal trade. We show that an improvement in the institutional environment has two effects. First, it intensifies the causality direction from banking to economic growth through a reduction in defaulting loans. Second, it reduces the interest rate spread. In the empirical section of the paper, we find bidirectional causality when analyzing 22 Middle Eastern and North African countries over the period 1984-2004. The first causality, which runs from banking development to economic growth, is more intense in countries with more developed institutional environment. The second causality runs from economic growth to banking and indicates that a more developed economy has a more developed banking system.

Achieving sustainable development by enhancing the quality of institutions in Saudi Arabia

“…Recent studies show that there is a positive effect of maintaining good governance for health care (Javanparast et al, 2018), human development, and education (Shih et al, 2012; Wiseman et al, 2010), and it helps to minimize the impact of economic and political crises (Christensen et al, 2018; Jusufi, 2018), improve the performance of local administrations (Keuffer, 2018; Matsubara and Endo, 2018), and support economic growth (Nabi and Suliman, 2009; Torezani, 2014).…”

“…On the other hand, economic growth is an essential factor in supporting the outcomes that the government expects. For example, according to this view, of the cost of issuing laws and regulations helps to strengthen the government’s control that is required for economic growth (Nabi and Suliman, 2009; Smith, 2007; Torezani, 2014). From these views, we could argue that there is a relationship between economic growth and the work of governance in the public sector, and a balance between the two should be the best means for enhancing economic development in economies that are developing and in transition.…”

Capital Markets, Infrastructure Investment and Growth in the Asia Pacific Region

“…The explanation for this was found to be an unfavorable institutional environment. There is a view that the institutions most conducive to investment and particularly private investment are those that support a market economy such as an established capital market, satisfactory ratings in ease of doing business criteria, free movement of foreign exchange and a judicial system with low levels of corruption and speedy determination of civil matters, Nabi and Suliman [100]. Egert, Kozluk and Sutherland [71] examined the relationship between infrastructure, growth and institutions in 26 OECD countries between 1975 and 2006.…”