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Causality between bank’s major activities and economic growth: evidences from Pakistan

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  • Saba Mushtaq

    (University of Karachi)

Abstract

Background Banking is an important sector of Pakistan’s economy. It is general consideration that bank’s major activities saving and lending have positive impact on economic growth. So the aim of this study is to investigate this consideration and also investigate that either growth led deposits and credits, or deposit and credits led growth means the purpose of this study is to investigate the direction of this relationship. Methods Johansen test of Co-integration and Granger Causality is employed by using time series data of Pakistan from 1961 to 2013. Results The results show that two major activities of banking sector that are saving and lending don’t have any long run or short run causality towards economic growth so the general consideration of positive impact of these activities proved wrong in case of Pakistan. However there is unidirectional causality running from GDP growth to credit provided by banking sector which shows that economic prosperity or economic growth will have a major impact on lending activities of banks meaning that demand following hypothesis is true for Pakistan in case of GDP and Bank’s credit or we can say that growth led Bank’s credit in Pakistan. Conclusions Hence Government and central bank should make policies by keeping this fact in consideration that bank’s two major activities that are saving and lending does not have impact on GDP growth. There might be other factors which influence economic growth of Pakistan more than banking sector these activities, which can be bank’s profitability, human resource, technology, infrastructure and other sectors of the economy. However GDP growth affects bank’s lending activities so during high economic growth year central bank and private bank’s management should introduce easy loans for businesses and industries and during poor economic growth years personal loan’s new schemes should be introduce by banks.

Suggested Citation

  • Saba Mushtaq, 2016. "Causality between bank’s major activities and economic growth: evidences from Pakistan," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-11, December.
    • Handle: RePEc:spr:fininn:v:2:y:2016:i:1:d:10.1186_s40854-016-0024-y
    DOI: 10.1186/s40854-016-0024-y
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    References listed on IDEAS

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    1. Muhammad Tahir, 2008. "An Investigation of the Effectiveness of Financial Development in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 13(2), pages 27-44, Jul-Dec.
    2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    3. Saša Obradović & Milka Grbić, 2015. "Causality Relationship between Financial Intermediation by Banks and Economic Growth: Evidence from Serbia," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(1), pages 60-72.
    4. Suna Korkmaz, 2015. "Impact of Bank Credits on Economic Growth and Inflation," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 5(1), pages 1-4.
    5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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    Cited by:

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    4. Zhang, Ying & Zhai, Ling & Sun, Haijia, 2019. "Does the level of financial leasing matter in the impact of bank lending on economic growth: Evidence from the global market (2006–2016)," Finance Research Letters, Elsevier, vol. 30(C), pages 352-359.

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    More about this item

    Keywords

    Granger Causality; Cointegration; Economic Growth; Bank deposits; Bank’s credit;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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