Mu a , Abdullah; As ou , Ba a; Paz, Ve onica
A icle
Banking sec o and economic g ow h in he digi al
ans o ma ion e a: Insigh s om maximum likelihood
and Bayesian s uc u al equa ion modeling
Asian Jou nal o Economics and Banking (AJEB)
P o ided in Coope a ion wi h:
Ho Chi Minh Uni e si y o Banking (HUB), Ho Chi Minh Ci y
Sugges ed Ci a ion: Mu a , Abdullah; As ou , Ba a; Paz, Ve onica (2024) : Banking sec o and
economic g ow h in he digi al ans o ma ion e a: Insigh s om maximum likelihood and Bayesian
s uc u al equa ion modeling, Asian Jou nal o Economics and Banking (AJEB), ISSN 2633-7991,
Eme ald, Leeds, Vol. 8, Iss. 3, pp. 335-353,
h ps://doi.o g/10.1108/AJEB-12-2023-0122
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/334127
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Banking sec o and economic
g ow h in he digi al
ans o ma ion e a: insigh s om
maximum likelihood and Bayesian
s uc u al equa ion modeling
Abdullah Mu a
Indiana Uni e si y o Pennsyl ania, Indiana, Pennsyl ania, USA and
A ab Ame ican Uni e si y Pales ine, Jenin, Pales ine
Ba a As ou
A ab Ame ican Uni e si y Pales ine, Jenin, Pales ine, and
Ve onica Paz
Indiana Uni e si y o Pennsyl ania, Indiana, Pennsyl ania, USA
Abs ac
Pu pose –In he digi al e a, he banking sec o has ans o med in o a powe ul in e media y, e ec i ely
connec ing su plus and de ici uni s. This dynamic landscape empowe s sa e s o secu e hei inances and
gene a e e u ns, while simul aneously enabling businesses and indi iduals o access capi al o in es men
and p omo ing economic g ow h. This s udy explo es he ela ionships among banking de elopmen
dimensions – ep esen ed by p ima y asse s and liabili ies, bank capi al (co e capi al and equi ed ese es)
and economic g ow h as measu ed by componen s o g oss domes ic p oduc (GDP).
Design/me hodology/app oach –The s udy consolida ed mon hly balance shee s om digi al banks o e a
20-yea pe iod, esul ing in an agg ega e mon hly balance shee ha e lec s he inancial posi ion o all digi al
banks in he Pales inian economy. The esea ch employs bo h maximum likelihood and Bayesian s uc u al
equa ion modeling o measu e he causal pa hways o he consolida ed balance shee wi h he indi idual
componen s o GDP.
Findings –The esul s e ealed ha bank main asse s (in es men s and loans) and liabili ies (deposi s)
collec i ely explain o 97% o bank capi al. In es men s and loans demons a e signi ican nega i e
co ela ions wi h bank capi al, while deposi s exhibi a posi i e impac . This leads o a undamen al
conclusion ha a subs an ial p opo ion o e ained ea nings wi hin he banking sec o is ein es ed, ueling
expansion and g ow h. Addi ionally, he esul s showed a signi ican ela ionship be ween bank capi al and
a ious GDP componen s, including p i a e consump ion, g oss in es men and ne expo s (p50.000).
Howe e , while he ela ionship be ween bank capi al and go e nmen spending was insigni ican in he
maximum likelihood es ima ion, Bayesian es ima ion e ealed a sligh ye posi i e impac o bank capi al on
go e nmen spending.
O iginali y/ alue –This esea ch s ands ou due o i s unique explo a ion o he in ica e ela ionship
be ween bank sec o de elopmen dimensions, p ima y asse sand liabili ies and hei impac on bank capi al in
he digi al e a. I o e s esh insigh s by di iding his connec ion in o speci ic dimensions and cons uc s,
u ilizing a comp ehensi e wo-decade da ase co e ing he digi al banks eco ds.
Keywo ds Bank capi al, Deposi s, Economic g ow h, GDP componen s, Loans
Pape ype Resea ch pape
Asian Jou nal o
Economics and
Banking
335
JEL Classi ica ion —C11, C58, G21, O16
© Abdullah Mu a , Ba a As ou and Ve onica Paz. Published in Asian Jou nal o Economics and
Banking. Published by Eme ald Publishing Limi ed. This a icle is published unde he C ea i e
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Recei ed 8 Decembe 2023
Re ised 14 Feb ua y 2024
1 Ap il 2024
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Accep ed 14 Ap il 2024
Asian Jou nal o Economics and
Banking
Vol. 8 No. 3, 2024
pp. 335-353
Eme ald Publishing Limi ed
e-ISSN: 2633-7991
p-ISSN: 2615-9821
DOI 10.1108/AJEB-12-2023-0122
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In oduc ion
Digi al banking de elopmen has ans o med he way indi iduals and businesses manage
hei inances. These inno a i e se ices le e age digi al echnology o p o ide cus ome s
wi h a con enien and e icien way o access and manage hei accoun s, conduc
ansac ions, and engage wi h hei banks (P o inch, 2023). Wi h digi al banking, cus ome s
can pe o m a wide ange o asks om he com o o hei sma phones, able s, o
compu e s, elimina ing he need o physical isi s o bank b anches (Ga iluk, 2023). This
accessibili y is pa icula ly ad an ageous in oday’s as -paced wo ld, whe e ime and
con enience a e highly alued. Mo eo e , wi h digi al pla o ms, banks can each a b oade
audience, making i easie o indi iduals and ins i u ions o deposi hei sa ings, and o
businesspeople and manu ac u e s o secu e loans. This expanded each no only inc eases
he liquidi y a ailable o loans, bu also enhance economic g ow h by educing geog aphical
limi a ions and ansac ional ba ie s (Feyen e al., 2021).
The e o e, he de elopmen o digi al banking has had a signi ican impac on inc easing
bank deposi s, loans, and in es men s (Tan oco, 2021). A bank’s p ima y asse s consis o
loans and in es men s, while i s p ima y liabili ies in ol e deposi s om bo h indi iduals
and ins i u ions (Bha acha yay, 2015). The amoun a ibu ed o he bank owne ’s equi y, o
capi al, is essen ially he di e ence be ween he o al asse s and o al liabili ies (Su esh and
Paul, 2014). An inc ease in bank capi al enables he bank o engage in mo e in es men s,
ex end addi ional loans, and pu sue new a enues o de elopmen (Kim and Sohn, 2017;
Fu long, 1992). Consequen ly, bank capi al se es as a ue and ep esen a i e indica o o a
bank’s de elopmen al and g ow h p ospec s (Kishan and Opiela, 2000).
The ques ion a hand pe ains o whe he he banking sec o wi h i s digi al de elopmen
can con ibu e o economic g ow h as indica ed by GDP (Ba ancea e al., 2021), and, i so, in
wha dimension o g ow h. In he exis ing li e a u e, he ela ionship be ween banking sec o
de elopmen and economic g ow h is no s aigh o wa d (Odhiambo, 2014). Se e al
esea che s ha e iden i ied a posi i e co ela ion be ween banking sec o de elopmen and
economic g ow h (Le ine and Ze os, 1998;Nyasha and Odhiambo, 2015;Alkhazaleh, 2017;
Ye and Zhao, 2019;Islam e al., 2019). On he o he hand, some esea che s ha e ound a
nega i e ela ionship (Shen and Lee, 2006;Naceu and Ghazouani, 2007;Pe ko ski and
Jo dan, 2014;Nwani and Jacob, 2016). In essence, he impac o banking sec o de elopmen
on economic g ow h emains a subjec o deba e and may a y depending on speci ic
ci cums ances and ac o s. Many o hese s udies ha e assessed banking sec o usingspeci ic
indica o s such as bank size, e u n on equi y, e u n on in es men , liquid liabili ies,
ope a ing p o i a e, and c edi o he p i a e sec o , bank capi al o asse s a io as e idenced
by he wo ks o Pe ko ski and Jo dan (2014),T ipa hy and P adhan (2014),Imam and Kpoda
(2016),Abusha beh (2017),Ba ancea e al. (2022). Howe e , i ’s no ewo hy ha none o he
p e ious s udies ha e sys ema ically explo ed banking sec o de elopmen in e ms o i s
majo componen s, including banking majo asse s (loans and in es men s), majo liabili ies
(deposi s), and owne equi y (bank capi al as an in e media y).
Mo eo e , he e has been limi ed a en ion gi en o unde s anding he ela ionship
be ween banking sec o de elopmen and he indi idual componen s o GDP. GDP is
composed o a ious elemen s, including consump ion, go e nmen spending, in es men ,
and ne expo s. Ou hypo hesis sugges s ha ad ancemen s in he banking sec o ,
especially h ough digi al banking, ha e a signi ican and measu able impac on he di e en
componen s o GDP, he eby in luencing o e all economic g ow h. Analyzing he impac o
banking de elopmen on each o hese GDP componen s can p o ide a mo e comp ehensi e
unde s anding o he s a e o he economy and i s pe o mance in di e en a eas. I can shed
ligh on how banking sec o de elopmen in luences consume beha io , go e nmen iscal
policies, in es men decisions, and ade dynamics, all o which con ibu e o o e all
economic g ow h.
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The pu pose o his esea ch is o in es iga e how banking sec o de elopmen in luences
economic g ow h, ocusing on he ollowing objec i es: (1) To e alua e how deposi s, loans,
and in es men s wi hin he banking sec o con ibu e o he o e all banking sec o capi al. (2)
To analyze he impac o bank capi al on he a ious componen s o GDP, including
consump ion, go e nmen spending, in es men , and ne expo s. In essence, his s udy aims
o unco e he ela ionships be ween banking sec o de elopmen , capi al accumula ion, and
hei e ec s on he di e en aspec s o economic g ow h, p o iding aluable insigh s in o
hese c i ical in e connec ions.
The ou come o his esea ch a e an icipa ed o be highly aluable o bo h comme cial
bank execu i es and policymake s, especially hose wo king wi hin cen al banks and
minis ies o inance. The esea ch indings a e gea ed owa ds op imizing he banking
sec o ’s con ibu ion o economic g ow h. Fu he mo e, his s udy adds o he exis ing body
o li e a u e on he banking sec o by add essing he ongoing deba e su ounding he ex en
and mechanisms h ough which he banking sec o impac s economic g ow h ac oss a ious
economic dimensions. I aims o shed ligh on hese in ica e ela ionships and p o ide a
deepe unde s anding o he banking sec o ’s ole in shaping a coun y’s economic landscape.
The subsequen sec ions o his s udy a e s uc u ed as ollow: Sec ion 2 co e s he
heo e ical amewo k e iew. Sec ion 3 in oduces and de ines empi ical model. Sec ion 4
explains he esea ch me hodology. Sec ion 5 o ms he hea o s udy by p esen ing
analyzing. and discussing he indings. Sec ion 6 ep esen s he conclusion o he esea ch.
Las ly, p ac ical policy implica ions and u u e esea ch di ec ions will be o mula ed.
Theo e ical amewo k
The de elopmen o he banking sec o and i s associa ion wi h a ious economic ac o s
ha e ga ne ed signi ican a en ion om academic esea che s and policymake s. Exis ing
esea ch has gene ally indica ed he p esence o a ela ionship, whe he posi i e o nega i e,
be ween banking sec o de elopmen and economic g ow h.
Bank asse s, liabili ies and capi al as indica o s o banking de elopmen
Banking asse s can be ca ego ized in o wo main ypes: loans and in es men s (Su esh and
Paul, 2014). Loans a e a p ima y income sou ce o banks, ep esen ing he money len o
bo owe s (Bha acha yay, 2015). In es men s, on he o he hand, a e secu i ies held by
banks o gene a e income o manage liquidi y (Gi man e al., 2015). The g ow h o banking
asse s se es as a signi ican indica o o economic ac i i y. An inc ease in bo owing by
businesses and consume s sugges s economic expansion. Howe e , apid asse g ow h may
also indica e excessi e isk- aking, po en ially inc easing banks’ ulne abili y o losses.
Bank liabili ies can be ca ego ized in o wo main ypes: deposi s and o he liabili ies (Su esh and
Paul, 2014). Deposi s ep esen he unds en us ed o he bank by deposi o s, while o he liabili ies
include bo owings om o he ins i u ions, epu chase ag eemen s, and acc ued expenses
(Bha acha yay, 2015). The g ow h o bank liabili ies is a key indica o o public con idence in he
banking sys em. When deposi o s ha e us in hei banks, hey a e mo e mo i a ed o deposi
hei unds wi h hem. Howe e , excessi e g ow h in bank liabili ies can also expose banks o
liquidi y isk, which is he isk o being unable o mee hei obliga ions o deposi o s.
Bank capi al ep esen s he di e ence be ween a bank’s asse s and i s liabili ies
(Bha acha yay, 2015). Capi al is impo an because i helps o p o ec deposi o s and o he
c edi o s om losses (Su esh and Paul, 2014). The le el o bank capi al is an impo an
indica o o a bank’s inancial s eng h (Fu long, 1992). A highe le el o capi al means ha a
bank is be e able o bea losses wi hou ha ing o eso o bailou by he go e nmen o
o he c edi o s (Rose and Hudgins, 2008).
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In he con ex o bank sec o de elopmen , p e ious esea che s indica ed bank
de elopmen by (ROA), Re u n on Equi y (ROE), and c edi acili ies (King and Le ine,
1993;Imam and Kpoda , 2016;Abusha beh, 2017;Lay, 2020). Howe e , measu ing bank
de elopmen h ough bank capi al p esen s a mo e comp ehensi e and obus app oach
compa ed o elying solely on me ics like Re u n on Asse s (ROA) and Re u n on Equi y
(ROE). This is because bank capi al summa izes a holis ic iew o a bank’s inancial posi ion,
co e ing no only he ou comes o i s asse s and liabili ies bu also i s owne equi y
(Bha acha yay, 2015;Su esh and Paul, 2014). In essence, i o e s a mo e comple e
ep esen a ion o he bank’s o e all inancial heal h. As a esul , bank capi al se es as a mo e
eliable indica o o banking de elopmen and g ow h, p o iding a well- ounded pe spec i e
on a bank’s capaci y o suppo economic ac i i ies and con ibu e o he inancial s abili y o
he b oade economy.
The li e a u e on bank asse s sugges s ha hey a e essen ial o unde s anding a bank’s
abili y o gene a e income and suppo economic ac i i ies h ough lending and in es men
p ac ices (Ba ancea, 2021). S udies by Be ge and Bouwman (2009) highligh how bank
asse s, pa icula ly loans and in es men s, ac as co e d i e o g ow h which acili a ing
liquidi y in he ma ke and enabling businesses o expand and g ow. This pe spec i e is
suppo ed by Demi g€
uç-Kun and Le ine (2001), who a gue ha he di e si y and olume o
banking asse s a e indica i e o he sec o ’s s eng h and i s abili y o suppo economic
g ow h.
On he bank liabili ies side, deposi s play a key ole in he banking sec o ’s de elopmen
by p o iding he p ima y sou ce o unding o banks’lending ac i i ies. The li e a u e
emphasizes he impo ance o deposi s in main aining he liquidi y and s abili y o banks,
he eby ensu ing hei ongoing abili y o con ibu e o economic de elopmen . Acco ding o
Diamond and Rajan (2001), he abili y o banks o a ac and e ain deposi s is c ucial o
hei ope a ional s abili y and o inc ease con idence among cus ome and in es o s. This
iew is esona ed by Go on and Win on (2003), who no e ha a heal hy g ow h in deposi s is
o en associa ed wi h an inc ease in cus ome us and a s able economic en i onmen , bo h
o which a e essen ial o s abilized banking de elopmen .
Capi al adequacy, he hi d dimension, is ecognized in he li e a u e as a c i ical measu e o
abank’s inancial heal h and i s esilience agains po en ial shocks (Mendy e al., 2023). The
capi albase o banks no onlysuppo s hei lending and in es men ac i i iesbu alsoac s as a
shieldagains losses, he eby ensu ing he s abili y o he o e all inancial sys em (Huu Vu and
Thanh Ngo, 2023). Resea ch by Flo eani e al.(2023)demons a es ha adequa e bank capi al is
undamen al o isk managemen and is essen ial in p omo ing con idence among deposi o s
and in es o s. Fu he mo e, he ela ionship be ween capi al adequacy and egula o y
amewo ks, as discussed by G
ze a e al.(2023), ecognizes he ole o bank capi al in
suppo ing banks’ope a ional p ac ices wi h b oade economic objec i es. These discussions
conclude ha bank asse s, liabili ies, and capi al a e no only indica o s o indi idual banks’
pe o mance bu also he o e all sec o ’s con ibu ion o economic de elopmen .
Rela ionship be ween banking sec o de elopmen and economic g ow h
Economic g ow h e e s o he inc ease in he p oduc ion o goods and se ices wi hin an
economy (Pe ko ski and Jo dan, 2014). In many cases, economic g ow h is quan i ied by
measu ing he change in a na ion’s GDP o e a speci ic pe iod (Timsina, 2014). Policymake s,
go e nmen o icials, and analys s commonly employ GDP as a key indica o o assess he
o e all heal h o a na ion’s economy and o analyze g ow h ends in bo h he sho and long
e m (Alkhazaleh, 2017). A well- unc ioning inancial sys em is c ucial o economic g ow h,
as i acili a es he low o unds om sa e s o bo owe s, he eby enabling in es men and
inno a ion.
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Bank capi al, which e e s o he inancial esou ces held by banks o abso b losses, plays
a c i ical ole in ensu ing he s abili y and esilience o he inancial sys em (Kishan and
Opiela, 2000). The inancial in e media ion hypo hesis sugges s ha banks play a cen al ole
in channeling sa ings in o p oduc i e in es men s, and highe le els o bank capi al enhance
his in e media ion p ocess by educing he isk o bank ailu es and encou aging lending
(McKinnon, 2010). Mo eo e , he isk managemen hypo hesis emphasizes he impo ance o
bank capi al in mi iga ing inancial c ises. Highe bank capi al cushions banks agains losses
du ing economic down u ns, enabling hem o con inue p o iding c edi and p e en a c edi
c unch ha could s i le economic g ow h (Be ge and Ch is a, 2013).
Nume ous s udies ha e ound a posi i e ela ionship be ween bank de elopmen and
economic g ow h (Abusha beh, 2017;Alkhazaleh, 2017;Hussain and Kuma Chak abo y,
2012;Lay, 2020;Gu u and Yada , 2019;Oz u k and Ullah, 2022). This sugges s ha highe
le els o bank capi al can con ibu e o as e economic g ow h. The s eng h o he
ela ionship be ween bank capi al and economic g ow h can a y ac oss coun ies,
depending on ac o s such as he le el o inancial de elopmen , ins i u ional quali y, and
mac oeconomic condi ions (Le ine e al., 2000).
Bank capi al plays a c ucial ole in acili a ing ade inance, which is essen ial o
businesses o engage in in e na ional comme ce (Niepmann and Schmid -Eisenloh , 2013).
When banks ha e adequa e capi al le els, hey a e mo e willing o ex end c edi o expo e s
and impo e s, he eby aising c oss-bo de ade and boos ing ne expo s, a componen o
GDP. Ba ancea e al. (2022) ound ha he g ow h o he GDP se ing as a p oxy o economic
g ow h, was in luenced by he a io o bank capi al o asse s o e h ee decades in se e al
coun ies, including Boli ia, he Czech Republic, Es onia, Malaysia, Pe u, Poland, and
Thailand. Addi ionally, well-capi alized banks can p o ide hedging ins umen s o mi iga e
o eign exchange isks, u he encou aging in e na ional ade (Gi man e al., 2015).
Bank capi al is a key de e minan o in es men , ano he componen o GDP. When banks
ha e su icien capi al, hey a e mo e con iden in hei abili y o abso b losses and main ain
lending du ing economic down u ns (King and Le ine, 1993). This con idence leads banks o
ex end mo e c edi o businesses o in es men pu poses, d i ing economic g ow h. Mo eo e ,
well-capi alized banks a e be e equipped o moni o and e alua e in es men p ojec s, educing
he isk o misalloca ion o capi al and p omo ing p oduc i e in es men s (Bha acha yay, 2015).
Bank capi al in luences p i a e consump ion, a signi ican componen o GDP, by
a ec ing household bo owing capaci y (San ome o, 1997). When banks ha e su icien
capi al, hey a e mo e likely o app o e loans o consume s, allowing hem o pu chase goods
and se ices, he eby s imula ing consump ion-d i en economic g ow h. Addi ionally, well-
capi alized banks can o e lowe in e es a es on consume loans, u he enhancing
households’pu chasing powe and imp o ing consump ion.
Bank capi al plays a less di ec ole in in luencing go e nmen spending, ano he
componen o GDP. While banks do no di ec ly inance go e nmen expendi u es, hey can
indi ec ly a ec go e nmen bo owing capaci y (J
acome e al., 2012). Well-capi alized banks
a e mo e likely o pu chase go e nmen bonds, p o iding a sou ce o inancing o
go e nmen spending (Gi man e al., 2015). Addi ionally, a well- unc ioning inancial sys em,
unde pinned by adequa e bank capi al, can boos ax e enues, p o iding he go e nmen
wi h mo e esou ces o spending.
Model de elopmen
This esea ch e alua es he causal ela ionship by examining, in he i s ound, he
ela ionships be ween he (loans, in es men , and deposi s) as exogenous a iables, and he
bank capi al as an endogenous a iable. In he second ound, he bank capi al is an
exogenous a iable and he ou GDP componen s a e endogenous a iables.
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The p edic o s o he Bank Capi al (CAPÞin he model a e he ollowing exogenous
a iables: In es men s ðc1Þ, Deposi s ðc2Þ, Loans ðc3Þ. These exogenous a iables ep esen
he di ec causal e ec s in he model on he Bank Capi al (CAPÞ. This ela ionship ep esen s
all e ec s which a e de e mined by sums o p oduc s o s uc u al coe icien s, and i is
illus a ed in he ollowing equa ions (1) and (2):
CAP ¼
α
1c1þ
α
2c2þ
α
3c3þ
ε
3(1)
CAP ¼X
3
n¼1
α
ncnþ
ε
i(2)
Fu he mo e, he model includes ou addi ional endogenous a iables (GDP dimensions).
The a ow links he i s le el h ee exogenous a iables o le el o Bank Capi al (CAPÞ, and
hen, i links Bank Capi al (CAPÞ(second le el exogenous a iable) o P i a e Consump ion
(PCÞ, Go e nmen Spending (GSÞ, G oss In es men (GIÞ,and Ne Expo s (NEÞsugges ing
he indi ec linkage.
Hence, o es ima e he o al e ec on he P i a e Consump ion (PCÞ, we sum up he e ec s
o he h ee exogenous a iables ( i s le el exogamous) on he Bank Capi al (CAPÞ, and Bank
Capi al (CAPÞin he (second le el exogamous) i sel on he P i a e Consump ion (PCÞ. The
ma hema ical o mulas o he o al e ec on P i a e Consump ion (PCÞ, a e deno ed in
equa ions (3) and (4):
PC ¼β1* CAPþ
ε
1(3)
PC ¼β1
α
1c1þβ1
α
2c2þβ1
α
3c3þ
ε
3þ
ε
1(4)
Also, o es ima e he o al e ec on he Go e nmen Spending (PCÞ, G oss In es men
(GIÞ,and Ne Expo s (NEÞ; we ollow he same logic in P i a e Consump ion (PCÞcase. The
ma hema ical equa ions o he o al e ec on Go e nmen Spending (GS) a e deno ed in
equa ions (5) and (6). The ma hema ical o mula ion o G oss In es men (GIÞ,a e
ep esen ed in equa ions (7) and (8), and ma hema ical o mula ion o Ne Expo s (NEÞa e
deno ed in equa ions (9) and (10).
GS ¼γ1* CAPþ
ε
2(5)
GS ¼γ1
α
1c1þγ1
α
2c2þγ1
α
3c3þ
ε
2þ
ε
1(6)
GI ¼κ1* CAPþ
ε
4(7)
GI ¼κ1
α
1c1þκ1
α
2c2þκ1
α
3c3þ
ε
4þ
ε
1(8)
NE ¼
ν
1* CAPþ
ε
5(9)
NE ¼
ν
1
α
1c1þ
ν
1
α
2c2þ
ν
1
α
3c3þ
ε
5þ
ε
1(10)
Since i is no ob ious wha combina ions o pa ame e s measu e he indi ec e ec on P i a e
Consump ion (PCÞ, we sugges o e alua e he ac ion o he o al e ec o P i a e
Consump ion (PCÞ, which is explained by he Bank Capi al (CAPÞand he ac ion o he o al
e ec o P i a e Consump ion (PCÞ, which is owed o he Bank Capi al (CAPÞ. Speci ically, in
o de o quan i y he deg ee o which he Bank Capi al (CAPÞmodi ies he e ec s o he i s
le el h ee exogenous a iables—In es men s ðc1Þ, Deposi s ðc2Þ, and Loans ðc3Þ, on Bank
Capi al (CAPÞ, we calcula e he ac ion o ou pu esponse o which Bank Capi al (CAPÞ
would be su icien in he case o P i a e Consump ion (PCÞ, which is embodied in he
ollowing ma hema ical equa ions:
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CAP
PC ¼P
3
n¼1
α
ncnþ
ε
i
β1* CAPþ
ε
1
(11)
CAP
PC ¼
α
1c1þ
α
2c2þ
α
3c3þþ
ε
3
β1
α
1c1þβ1
α
2c2þβ1
α
3c3þ
ε
3þ
ε
1
(12)
Following on he same logic as pe o med p e iously o he ac ion o ou pu esponse in he
case o he Go e nmen Spending (GSÞ, G oss In es men (GIÞand Ne Expo s (NEÞ, we can
also calcula e he same ac ion o ou pu esponse o which he le el o Bank Capi al (CAPÞ
would be su icien in he case o he Go e nmen Spending (GSÞ, which is deno ed in
ma hema ical equa ions (13) and (14), G oss In es men (GIÞas showed in ma hema ical
equa ions (15) and (16), and Ne Expo s (NEÞ, as ep esen ed in ma hema ical equa ions (17)
and (18):
CAP
GS ¼P
3
n¼1
α
ncnþ
ε
i
γ1* CAPþ
ε
1
(13)
CAP
GS ¼
α
1c1þ
α
2c2þ
α
3c3þþ
ε
3
γ1
α
1c1þγ1
α
2c2þγ1
α
3c3þ
ε
2þ
ε
1
(14)
CAP
GI ¼P
3
n¼1
α
ncnþ
ε
i
k1* CAPþ
ε
1
(15)
CAP
GI ¼
α
1c1þ
α
2c2þ
α
3c3þþ
ε
3
κ1
α
1c1þκ1
α
2c2þκ1
α
3c3þ
ε
4þ
ε
1
(16)
CAP
NE ¼P
3
n¼1
α
ncnþ
ε
i
1* CAPþ
ε
1
(17)
CAP
NE ¼
α
1c1þ
α
2c2þ
α
3c3þþ
ε
3
ν
1
α
1c1þ
ν
1
α
2c2þ
ν
1
α
3c3þ
ε
5þ
ε
1
(18)
Me hodology
In his esea ch, seconda y da a we e ga he ed om epu able sou ces including he
Pales inian Cen al Bu eau o S a is ics (PCBS), he Associa ion o Banks in Pales ine (ABP),
and he Pales inian Mone a y Au ho i y (PMA). The PCBS unc ions as he o icial
Pales inian s a is ical agency, asked wi h he essen ial ole o p o iding eliable s a is ical
da a bo h domes ically and on he global s age. Con e sely, he PMA se es as he eme ging
cen al bank o Pales ine. These o ganiza ions se e as c ucial sou ces o da a and insigh s
o his esea ch, ensu ing he eliabili y and c edibili y o he in o ma ion used in he s udy.
Da a and sample
The s udy elied on mon hly and qua e ly epo s issued by he Pales inian Mone a y
Au ho i y (PMA) ha de ail he pe o mance o he banking sec o (PMA, 2023a). These
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epo s con ain aluable da a, including in o ma ion on he olume o bank loans, deposi s,
and in es men s. The PMA da a was sou ced om he mon hly and qua e ly inancial
epo s submi ed by all digi al banks ope a ing wi hin he Pales inian economy. These
banks a e ca ego ized in o a ious g oups, including na ional and in e na ional banks, as
well as Islamic and con en ional banks. The u iliza ion o his comp ehensi e da ase om
he PMA epo s ensu ed a ho ough and inclusi e analysis o he banking sec o ’s ac i i ies
and con ibu ions o he Pales inian economy.
Among he c ucial epo s, he consolida ed balance shee s ands ou as one o he mos
i al esou ces (PMA, 2023b). This comp ehensi e epo amalgama es he inancial da a o
all ac i e digi al banks a he main accoun le el and is upda ed on a mon hly basis. I
se es as a aluable ool o gaining insigh s in o he collec i e inancial posi ion o all
Pales inian digi al banks. Fu he mo e, he PMA eleases a se ies o de ailed epo s ha
del e deeply in o speci ic ace s o he banking sec o (PMA, 2023c). These epo s co e a
wide ange o aspec s, including deposi ypes, cu ency b eakdowns, loan ma u i y
p o iles, sec o al dis ibu ion, loan sizes, in es men s, cash ese es, and a ious o he
c i ical inancial me ics. Toge he , hese epo s p esen a comp ehensi e pe spec i e o
he Pales inian digi al banking sec o , se ing as ich esou ces o esea che s and
policymake s.
Con e sely, he Pales inian Cen al Bu eau o S a is ics (PCBS) plays a key ole by issuing
a ange o pe iodic epo s ha span ac oss all economic sec o s (PCBS, 2023a). No ably, he
GDP b eakdown by componen epo , which sepa a es P i a e Consump ion, Go e nmen
Spending, G oss In es men , and Ne Expo s holds pa icula signi icance (PCBS, 2023b).
These epo s unde go a s ic p ocess o exchange and e i ica ion, in ol ing mul iple
Pales inian ins i u ions such as he Minis y o Finance, he Minis y o Economy, and he
Pales inian Cen al Bu eau o S a is ics i sel , be o e hei o icial elease. This collabo a i e
alida ion p ocess se es as a c ucial s ep in ensu ing he accu acy and eliabili y o he da a
p esen ed in hese epo s.
Technical me hod
P io esea che s ha e employed a ious s a is ical me hodologies o assess he ela ionship
be ween banking sec o de elopmen and economic g ow h. Some ha e u ilized eg ession
analysis and G ange causali y es s (T ipa hy and P adhan, 2014;Islam e al., 2019). O he s,
such as Chien and Hu (2008),Acquah-Sam and King (2014),Lee e al. (2018), ha e selec ed
mo e complex app oaches such as S uc u al Equa ion Modeling (SEM). SEM is pa icula ly
ele an when he e a e mul iple dependen a iables in he analysis (S eine , 2005). This
echnique exceeds mul iple eg ession by concu en ly conduc ing mul iple eg ession
analyses and gene a ing an o e all model i assessmen . In e alua ing he model’s i , he
SEM me hod employs a ious goodness-o - i indexes including chi-squa e s a is ics, GFI,
RMSEA, CFI, NFI, and RMR (Singh and Wilkes, 1996). These me hods collec i ely p o ide a
comp ehensi e oolki o explo ing he in ica e ela ionships be ween banking sec o
de elopmen , economic g ow h.
In his s udy, SEM me hod is employed o examine he ela ionships among he a iables,
speci ically he impac o main asse s (loans and in es men s) and he p ima y liabili y
(deposi s) on bank capi al, ollowed by an assessmen o he in luence o bank capi al on he
componen s o GDP. Maximum likelihood me hod o es ima ion is used in his esea ch as i is
he de aul in mos s uc u al equa ion modeling so wa e (S eine , 2005). The minimum
numbe o cases o maximum likelihood es ima ion should be a i e imes he numbe o ee
pa ame e s including e o e ms (Golob, 2003). The numbe o obse a ions in his esea ch
is 164 eco ds ha mee s he equi emen as he es ima ion model con ains 13 a iables
including he e o e ms.
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In summa y, he s udy con ibu es o bo h heo y and p ac ice by con i ming he banking
sec o ’s cen al ole in economic g ow h, and by demons a ing he s a egic ein es men
decisions made by banks ha shape hei impac on he b oade economy.
Theo e ical con ibu ion
This esea ch makes se e al heo e ical con ibu ions o he ields o banking, inance, and
economic de elopmen . Fi s ly, i p o ides empi ical e idence o he posi i e ela ionship
be ween banking sec o de elopmen , as ep esen ed by bank capi al, and economic g ow h.
This inding suppo s and ex ends p io esea ch conduc ed in di e en economies and
egions. By demons a ing he signi ican impac o bank capi al on g oss in es men and
p i a e consump ion, his s udy con i ms he essen ial ole o he banking sec o in d i ing
economic g ow h.
Secondly, he esea ch con ibu es o he unde s anding o he complex ela ionship
be ween banking sec o de elopmen and ade dynamics. The nega i e ela ionship
be ween bank capi al and ne expo s highligh s he ade de ici s in de eloping coun ies. I
unde sco es he impo ance o conside ing ade dynamics when assessing he impac o
banking sec o de elopmen on a ious componen s o economic g ow h. Addi ionally, his
s udy unde sco es he unc ions o he banking sec o in an economy. I highligh s how banks
se e as c ucial in e media ies by p o iding c edi and banking se ices ha acili a e a wide
ange o economic ac i i ies, om wholesale and e ail ade o impo s and expo s, as well as
g oss in es men . This unde s anding suppo s he no ion ha a h i ing banking sec o
plays a pi o al ole in aising economic de elopmen ac oss di e se economic sec o s.
Fu he mo e, he esea ch aligns wi h undamen al accoun ing p inciples by illus a ing
how changes in banking sec o asse s (in es men s and loans) a e accompanied by
co esponding adjus men s in capi al ( e ained ea nings) and liabili ies (deposi s). This
obse a ion adds a inancial pe spec i e o he s udy’s heo e ical con ibu ions, emphasizing
he in e connec edness o banking sec o componen s.
Finally, his s udy con ibu es o a mo e holis ic unde s anding o he banking sec o ’s
ole in economic de elopmen . I b idges gaps in exis ing esea ch by in eg a ing inancial
managemen p inciples wi h mac oeconomic impac s, o e ing a s ong heo e ical
amewo k. This amewo k can in o m bo h u u e academic inqui ies and p ac ical
policy o mula ion. Such policies a e designed o le e age he banking sec o ’s capabili ies o
suppo sus ainable economic g ow h.
P ac ical implica ions
The indings ca y se e al p ac ical implica ions ha can guide policymake s, banking
ins i u ions, en ep eneu s, in es o s, and economic s akeholde s. Policymake s can use he
empi ical e idence p esen ed in his s udy o in o m hei decisions ega ding he banking
sec o ’s ole in economic de elopmen . Recognizing he posi i e impac o bank capi al on g oss
in es men and p i a e consump ion. Policymake s may conside policies ha encou age and
suppo he g ow h and s abili y o he banking sec o . Measu es such as egula o y amewo ks
ha p omo e banking sec o de elopmen can be adop ed o s imula e economic g ow h.
Fu he , gi en he obse ed nega i e ela ionship be ween bank capi al and ne expo s,
ade policies should be designed wi h an unde s anding o he ole o he banking sec o in
ade dynamics. Policymake s may explo e s a egies o enhance banking se ices ha
suppo expo -o ien ed indus ies, such as p o iding a o able loan e ms and inancial
ins umen s o expo e s. These indings can also be applied o de eloping economies acing
ade de ici s. Policymake s and banking ins i u ions in such coun ies can conside ailo ed
app oaches o banking sec o de elopmen o add ess ade imbalances and suppo
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economic g ow h. The e o e, de eloping inancial in as uc u es, such as expo c edi
agencies o gua an ee schemes, could also be bene icial.
Fu he mo e, banking ins i u ions can ake s a egic ac ions based on he unde s anding
ha loans, in es men s, and deposi s a e c i ical de e minan s o bank capi al. They may
ocus on p uden isk assessmen and di e si ica ion s a egies o op imize hei loan and
in es men po olios. Banks could also explo e inno a i e deposi mobiliza ion s a egies o
g ow hei capi al, which, in u n, could und u he in es men s and loans, c ea ing a
wo hy cycle o g ow h.
Fu he mos , he s udy’s insigh s could inspi e educa ional and capaci y-building
ini ia i es o enhance inancial li e acy, enabling en ep eneu s and consume s o make mo e
in o med inancial decisions ha con ibu e o economic g ow h. Unde s anding he b oade
impac o banking ac i i ies could lead o mo e sus ainable business p ac ices and
in es men choices ha align wi h na ional economic objec i es.
Finally, economic s akeholde s, including en ep eneu s and in es o s, can use he
indings o be e unde s and he banking sec o ’s ole in economic de elopmen . Fo
ins ance, en ep eneu s seeking capi al o in es men p ojec s can collabo a e wi h banks o
access inancing o p ojec s ha s imula e economic g ow h.
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