Does bank competition promote economic growth? Empirical evidence from selected South Asian countries

Bijoy Rakshit (Department of Humanities and Social Sciences (HSS), Indian Institute of Technology Ropar, Ropar, India)
Samaresh Bardhan (Department of Humanities and Social Sciences (HSS), Indian Institute of Technology Ropar, Ropar, India)

South Asian Journal of Business Studies

ISSN: 2398-628X

Publication date: 3 June 2019

Abstract

Purpose

Bank competition and financial stability are often cited as important drivers of economic growth. Bank competition plays a very significant role in enhancing the efficiency and determining the stability of a financial system. However, a question of interest is whether bank competition enhances or hindrances the economic growth of a country. The purpose of this paper is to investigate the role of bank competition and financial stability on economic growth for selected South Asian economies over the period 1997–2016.

Design/methodology/approach

To investigate whether bank competition enhances or hinders economic growth, the author applies a two-step estimation technique. First, the author estimates bank competition using the Lerner index and adjusted Lerner index and, second, examines the joint effect of bank competition and financial stability on economic growth applying both panel regression model and system GMM techniques.

Findings

Empirical findings reveal that the banking sector in South Asian economies is competitive as indicated by the estimated values of Lerner and adjusted Lerner index. Moreover, the joint effect defined by the interaction between banking competition and banking stability also reveals a positive and significant impact on economic growth. This finding implies that both banking competition and banking stability are significant long-term determinants of economic growth in South Asian economies.

Practical implications

This paper suggests flexible banking regulation policies such as low net interest rate margins, lesser activity restrictions and entry of foreign banks along with few contestability measures to increase bank competition in South Asian countries. This is because as higher the competition, greater is the chance for efficient allocation of resources and hence economic growth.

Originality/value

This paper is the first of its kind that considers the joint role of bank competition and financial stability on economic growth. The application of a semi-parametric approach in the estimation of marginal cost is also a unique contribution to empirical literature.

Keywords

Citation

Bijoy Rakshit and Samaresh Bardhan (2019) "Does bank competition promote economic growth? Empirical evidence from selected South Asian countries", South Asian Journal of Business Studies, Vol. 8 No. 2, pp. 201-223

Download as .RIS

DOI

: https://doi.org/10.1108/SAJBS-07-2018-0079

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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