Banking sector development and economic growth nexus in BRICS

Abstract

The paper examined the influence of the banking sector on economic growth in the BRICS countries using panel data analysis methods (1987–2020). The effect of the complementarity variable on economic growth in BRICS was also explored using the same data set. The lack of agreement in the empirical literature on the relationship between banking sector development and growth motivated this study. The study was also motivated by the desire to deal away with the omitted variable bias which is to a very large extent plagued the available literature on the influence of the banking sector on economic growth. Panel data analysis included fixed effects (FE), fully modified ordinary least squares (FMOLS), and pooled ordinary least squares (OLS). It was observed that the banking sector had a significant positive effect on economic growth under the pooled OLS (all three models) and fixed effects (model 1). Model 2 under the fixed effects indicate a negative significant relationship moving from the banking sector towards economic growth. FMOLS (models 1 and 2), pooled OLS (models 1, 2 and 3), and fixed effects (model 1) show that the complementarity variable enhanced economic growth significantly. Policies aimed at enhancing banking sector development and domestic investment should be implemented without delay by the BRICS countries if they intend to bolster economic growth.