Financial institution development plays a crucial role on the economy. According to the (Porter, 1966), the author shows that the level of financial institution development is the best benchmark of common economic development. And (Arellano and Bond, 1991) also found that financial institution in particular banks act as intermediaries between supply of savings and demand for loans will straightly influence the local and national economic development. Policymakers should bear in mind that the importance role of banks. Financial sector intensifying and sophistication is significant to the growth creation process even if they are comparatively big and liberalized (McKinnon, 1973) and (Shaw, 1973). (Dehejia and Lleras-Muney, 2003) indicate that a well-functioning banking system is able to improve economic growth. However, based on the studies of (Cetorelli and Gambera, 2001), there are negative relationship between the overall effect of bank concentration on the macroeconomic performance if industrial sectors are more requiring external financing for its growth rate especially younger firms are encouraging credit for their business. Nonetheless, if more dependent on external finance, bank concentration can enhance the growing of industries (Cetorelli and Gambera, 2001). A tighter restriction on non-traditional bank activities or bank ownership of non-financing companies is one of the solutions to decrease the negative effect of bank concentration on economic growth.
The development of banks is significant on economic growth but non-bank financial institution is not significant. Previous studies (Cheng, and Degryse, 2010) show a strongly difference effect on growth between these two financial institutions. Compared to banks...
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...fect of financial institutions is not only come from an expansion of saving and investment, but also from the marginal rate of return on investment. (Goldsmith, 1969) indicates that more efficient allocation of savings among potential investment can enhance the marginal rate of return on investment.
According to the (Beck et al, 2005), the studies show that financial obstacles on small firms may bring negative impact on economic growth. Therefore, small firms must have healthy and well-functioning banking system. (Beck et al, 2008) prove that if small firms growing with well-developed financial system, they will be more able to expand their business greatly compared to others in economies. Besides that, they will also get the benefit from the system relate to savings mobilization and efficient financial intermediation roles (Gibson & Tsakalotos, 1994).
This chapter covers the overview of the country in a short history, banking system, commercial banks and interest rate theory. The chapter provides also the theoretical review of interest rate and profitability.
U.S. financial markets assume a vital part in helping the wellbeing and productivity of the economy, businesses, and individuals. There is a solid relationship between the soundness of the economy and budgetary business improvement and monetary development, resulting in the slightest change in financial markets greatly affecting the economy, businesses, and individuals. Financial markets influences the increase in capital, removes the risk of subsidiaries, and liquidity in currency markets. When the monetary markets are doing admirably, "firm-level, industry-level, and cross country considers all propose that the level of money related advancement applies an expansive, positive effect on financial development." (MIT, 2001)
The study gathered time series and annual data for the period covering 1987 to 2009. The methodology comprises econometric techniques such as; Augmented Dickey-Fuller (ADF) Unit Root test, Ordinary Least Square (OLS) method, Error Correction Mechanism (ECM) and Johansen Co-integration test. The key findings emerging from this study indicates that financial liberalization in Nigeria has been significant on her economic growth. Hence, it justifies the assertion of Mckinnon (1973) and Shaw (1973) on financial liberalization. The study also concludes that financial liberalization has not refrained investors from seeking funds from banks at the deregulated lending rate. Instead, the lending rate allowed for the effective and efficient intermediation of funds to the users of funds to participate in productive activities that add to economic growth. Exchange rate determination by international market forces of demand and supply has not been detrimental to the economy of Nigeria but rather it has been significant to boost economic growth. The macroeconomic instability resulted from financial liberalization does not have a negative influence on the overall output of the economy. So, it can be observed that macroeconomic instability cannot be attributed to financial liberalization. Even if financial development is significant for economic growth, financial liberalization has not really increased the depth of the financial system which would consequentially impact on the economy positively. The degree of openness is an important aspect of globalization which indicates that the trade relation of Nigeria with the rest of the world has contributed significantly towards economic
Before a bank can be described as too big to fail, the criticality of the roles played by such bank, its complexity, leverage, interconnectedness and size are some of the factors to be considered. On the size of these banks, Berger et al. (1997) discovered that some individual banks and overall banking systems in Europe reached enormous size relative to their countries’ GDP. In Iceland the liabilities of the overall banking system reached around 9 times GDP at the end of 2007, while it is 6.3 and 5.5 in Switzerland and United Kingdom respectively.
Raveesh (2011) has attempted to analyze the relationship between bank credit and economic growth in North-East region consisting of seven states and observed that banks has provided significant amount of money but there has not much impact on the economic growth causing the region towards further backwardness.
There were also many minor causes that brought about improved industry. A larger banking system proved to be a key factor in better business. This system allowed bus...
According to Levine (1997), the financial system enables the more effective exchange of goods and services, mobilizes individual and corporate savings, enables the more efficient allocation of resources and monitoring of corporate managements through capital markets and allows for the pooling of risk. Financial intermediaries such as building societies, insurance companies, banks, pension funds, credit unions and the stock market are heavily relied on. Hence, without them investment might not take place, technological progress is likely to be withheld leading to a reduction in growth process. There is obviously some relationship between the development of a financial sector and economic growth once the functions of the financial sector are efficiently and effectively undertaken.
Banking scenario since 1991 has been a process of transformation and consolidation. With financial sector reforms implementation, the microenvironment of banking sector has undergone a radical change. Almost all insulations to commercial banking have been peeled off and it has been susceptible to all types of exposures now. There has been paradigm shift in operational, functional, environmental, technological spheres. The reforms emphasised the “commercial character” of the banking system and helped the banks to stand on a firm footing. The first phase of reforms directed mainly towards the operational efficiency has brought concepts like prudential accounting norms, Deregulation of Interest Rates, Credit Delivery, Transparency, Capital Adequacy Norms, Autonomy in Management etc. Banks started cleansing their balance sheets, competition led to improvement in their efficiencies and profit concept being recognised as a test of commercial viability. The transparency made them to realise their own strengths.
(Sassen, 2005), argues that centralization has taken a new form. The major contributor to this new form is reorganization of the financial industry and spatial dispersion of economic activities. This has led to an overall concentration in control and ownership. Dispersion of the economic activities has led to specialization of firms as well as expansion in central functions. The financial industry is characterized by proliferation of financial firms, innovations and increased growth.
A variable for measuring financial deepening is credit to the financial sector. There are burgeoning empirical evidence to support the positive relationship between financial deepening and economic growth. However, McKinnon-Shaw school of thought identified policy implications that may hamper financial development and by extension economic growth to include government restrictions in the banking system through interest rate ceilings, high reserve requirements and directed sectoral credit programme. Arguing in favour of an efficient allocation of capital within an economy to foster economic growth, Levine (1997) observed that since the early 1990s, there has been growing recognition for the positive impact of financial intermediation on the economy. In a study conducted on financial development and economic growth in 77 countries, King and Levine (1993) found that banking sector development can spur economic growth in the long run and there exists a positive and statistically significant impact of growth rate in per capita real money balances on real per capita gross domestic product growth. Discussing on the role of banks in promoting economic growth, Beck (2003) says that banks play diverse roles in fostering economic development and fulfill the crucial role of mobilization
Indian banking industry is the lifeline of the nation and its people. Banking sector is help to developing the various sectors of the economy. Thus, economic development of a country is depends on the success of banking industry and this success is determined to a large extent by understanding the needs and satisfaction of its customers. Today, Indian banks can confidently compete with modern banks of the world.
There have been several significant structural reforms in Indian banking sector since 1990s. It has now been open to more competitions by the entry of new private banks and gradual liberalization of the banking sector. The sector is currently valued at Rs 81 trillion (US$ 1.31 trillion). It is believed that there is potential for India to be the 5th largest banking industry in the world by 2020 and the 3rd largest by 2025, according to an industry report. (IBEF, 2014)
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
The bank failure in Jamaica illustrates how negative mindsets and behaviors can devastate the financial system and disrupt economic growth. The primary role of any bank is to safeguard its customer’s money, offer interest rate on deposits, lend money to creditworthy individuals, and make sound investment decisions to maximize shareholder value. Because of rapid economic growth between the late 1980s and early 1990s in Jamaica, the Central National Bank (CNB) and Worker’s Savings and Loans Bank (WSLB) loosened their monetary policies, provided preferential interest rates and extended credit beyond what was reasonable to members of its own board of directors, managing directors, and officers of the bank. These actions posed significant risks to the bank and its future.
Banks sector is playing an important role in economies. The banking industry, as the classic and the most influential of financial intermediaries, facilitates economic operations. Financial sector in the worldwide country has been changes over these years by looking the changes of financial structure environment and economic conditions. Thus, banks are a very important point to financial system and play an important role as control and contribute growth to the economic sector.