Relationship between banking sector development and inclusive growth

Abstract

According to an inclusive growth framework, the top objectives of the economic policy shift from increasing incomes themselves to well-being. While banking sector development has conventionally been considered a growth factor, there is no clear understanding of its impact on inclusive growth. This article explores how the banking sector’s qualitative development, measured in dimensions of the services availability, lending supply, stability, and reliability of banking activity, relates to inclusive growth. To define the relations between banking system development and inclusive growth, the panel regression was employed for a sample of 46 economies selected based on the prescribed principles of sources reputability, methodology consistency, limits in data blanks, and differentiated into groups according to the World Bank’s classification. The regressions’ assessment and involved tests show evidence of the quality of constructed models and present the following results. The banking availability, approximated with the number of automated teller machines, fosters inclusive growth regarding all groups of countries. In contrast, the increase in the number of commercial banking branches has inverse relations between high-income and upper-middle-income countries, and direct for lower-middle-income countries. The bank credit expansion negatively influences the inclusive growth for high income and lower-middle-income countries. The banking sector stability approximated with bank capital to assets ratio matters in terms of inclusive growth for high-income countries only, while this indicator for upper middle and lower middle economies is statistically insignificant.

The Relationship Between Economic Development, Banking Sector Performance and Financial Globalization: Evidence from OECD Countries

“…This situation tells us that both the banking sector performance of OECD countries is important for economic development and economic development is important for the banking sector performance. This result of the study is similar to the findings obtained Altunç (2008) study for Turkey in 1970-2006and Pradhan et al (2014a for ASEAN countries over the period of 1961-2012. However, it does not match the study findings of Akpansung and Babalola (2011), Awdeh (2012), Ofori-Abebrese et al (2017, Mhadhbi et al (2020) and Samour et al (2022), which found a one-way causality relationship from economic development to bank credit.…”

“…At the same time, according to many researchers, the economic development of developing and developed countries is found to be increasing by financial globalization (Bhanumurthy and Kumawat, 2020;Egbetunde & Akinlo, 2015;Sahoo and Sethi, 2020;Schularick and Steger, 2010). Liang and Reichert (2006) focuse on the period 1960-2000 and use the multiregression model to determine the result that banking sector development and investment increased the economic development of developed and developing countries. Pradhan et al (2014a) analyzes the relationship between economic growth, banking sector development, stock market development and other macroeconomic variables in ASEAN countries.…”