nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2007‒09‒16
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Do efficient banking sectors accelerate economic growth in transition countries By Koivu, Tuuli
  2. Introducing Islamic Banks into Coventional Banking Systems By Juan Sole
  3. Financial sector development in transition economies: Lessons from the first decade By Bonin, John; Wachtel , Paul

  1. By: Koivu, Tuuli (BOFIT)
    Abstract: The relationship between financial sector and economic growth in transition countries has been largely ignored in the earlier empirical literature. In this paper, we analyse the finance-growth nexus using a fixed-effects panel model and unbalanced panel data from 25 transition countries during the period 1993-2000. We measure the qualitative development in the banking sectors using the margin between lending and deposit interest rates. Our second variable for the level of financial sector development is the amount of bank credit allocated to the private sector as a share of GDP. According to our results, the interest rate margin is significantly and negatively related to economic growth. This outcome is in line with theoretical models and has important policy implications. On the other hand, a rise in the amount of credit does not seem to accelerate economic growth. The main reasons behind this result could be the numerous banking crises the transition countries have experienced and the soft budget constraints that are still prevalent in many transition countries. Due to these specific characteristics the growth in credit has not always been sustainable and in some cases it may have led to a decline in growth rates.
    Keywords: financial sector; transition economies; economic growth; panel data
    Date: 2007–09–12
  2. By: Juan Sole
    Abstract: Over the last decade, Islamic banking has experienced global growth rates of 10-15 percent per annum, and has been moving into an increasing number of conventional financial systems at such a rapid pace that Islamic financial institutions are present today in over 51 countries. Despite this consistent growth, many supervisory authorities and finance practitioners remain unfamiliar with the process by which Islamic banks are introduced into a conventional system. This paper attempts to shed some light in this area by describing the main phases in the process, and by flagging some of the main challenges that countries will face as Islamic banking develops alongside conventional institutions.
    Date: 2007–07–23
  3. By: Bonin, John (BOFIT); Wachtel , Paul (BOFIT)
    Abstract: The first decade of transition witnessed rapid and tumultuous financial sector development. Although, few transition economies have reached the point where institutions and markets fulfill all the functions of market based financial intermediation, progress has been much more rapid than had been anticipated. In many countries, active market-oriented financial institutions function where there was only a state planning mechanism a decade ago. Initial experiences showed that bank privatization programs often failed to achieve independence from government control and from undesirable weak clients. It is now widely accepted that the participation of foreign strategic investors in banking is an effective way of meeting these goals Capital market development is complicated by the need to support the development of institutional infrastructure and regulatory mechanisms while at the same time avoid interfering in the markets. In many instances policy makers expected immature markets and institutions to accomplish unattainable goals. Equity markets cannot be effectively support mass privatization programs. There are still many missing pieces in virtually all of the transition country capital markets.
    Keywords: capital markets; financial sector; privatization; transition economies
    Date: 2007–09–11

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