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Financial Sector Development and Economic Growth in Bangladesh: A Factor Analysis Based Causality Approach

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  • Altaf Hossain
  • Suman Biswas
  • Md. Nasif Hossain
  • Arnab Kumar Poddar

Abstract

To understand the finance-growth nexus, this paper is intended to find a fewer number of important financial factors using Factor Analysis on some selected indicators of Bangladesh financial sector during the period 1988-2013. This paper then tries to check whether the identified financial factors cause economic growth or economic growth causes financial factors using the Granger ¨C Causality test. Factor Analysis shows that financial indicators under the dimensions, depth and stability form Factor 1, and the indicators under the dimensions, use/access and efficiency form Factor 2. Being consistent with economic sense, Granger ¨C Causality test shows that no financial factor significantly causes economic growth; rather economic growth causes ¡°depth/stability¡± (¡®private credit + capitalization¡¯ /non-performing loan) factor of financial sector during the period. In summary, on average, financial sector of Bangladesh is being unstably (being increased non-performing loan) deepened with response to the demand of economic growth since 1988.

Suggested Citation

  • Altaf Hossain & Suman Biswas & Md. Nasif Hossain & Arnab Kumar Poddar, 2017. "Financial Sector Development and Economic Growth in Bangladesh: A Factor Analysis Based Causality Approach," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(8), pages 229-238, August.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:8:p:229-238
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    References listed on IDEAS

    as
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    2. Giuliano, Paola & Ruiz-Arranz, Marta, 2009. "Remittances, financial development, and growth," Journal of Development Economics, Elsevier, vol. 90(1), pages 144-152, September.
    3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    4. Jean Arcand & Enrico Berkes & Ugo Panizza, 2015. "Too much finance?," Journal of Economic Growth, Springer, vol. 20(2), pages 105-148, June.
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    6. Godfrey Ndlovu, 2013. "Financial Sector Development and Economic Growth: Evidence from Zimbabwe," International Journal of Economics and Financial Issues, Econjournals, vol. 3(2), pages 435-446.
    7. Paul Wachtel, 2001. "Growth and Finance: What Do We Know and How Do We Know It?," International Finance, Wiley Blackwell, vol. 4(3), pages 335-362.
    8. Chandavarkar, Anand, 1992. "Of finance and development: Neglected and unsettled questions," World Development, Elsevier, vol. 20(1), pages 133-142, January.
    9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Cited by:

    1. Faroque Ahmed & Md. Jamal Hossain & Mohammad Tareque, 2020. "Investigating the Roles of Physical Infrastructure, Financial Development and Human Capital on Economic Growth in Bangladesh," Journal of Infrastructure Development, India Development Foundation, vol. 12(2), pages 154-175, December.

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    More about this item

    Keywords

    finance ¨C growth nexus; factor analysis; depth/stability; efficiency/accessibility; Bangladesh;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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