The Institutional Environment and the Banking - Growth Nexus: Theory and Investigation for MENA

Nabi, Mahmoud Sami and Suliman, Mohamed Osman (2008): The Institutional Environment and the Banking - Growth Nexus: Theory and Investigation for MENA. Published in: ERF Working Paper No. 392 (April 2008)

Abstract

This paper seeks to provide some theoretical and empirical answers to the following question: Does the institutional environment affect the causality relationship between banking development and economic growth?

In the theoretical part, we develop an endogenous growth model where the institutional environment is captured through two indicators: the judicial system efficiency and the easiness of informal trade. We show that an improvement of the institutional environment has two effects. First, it intensifies the causality direction from banking to economic growth through a reduction of defaulting loans. Second, it reduces the interest rate spread. In the empirical part, considering twenty-two MENA countries over the period 1984-2004, we find a bi-directional causality. The first one, which runs from banking development to economic growth, is more intense in countries with a more developed institutional environment. The second causality runs from economic growth to banking and indicates that a more developed economy has a more developed banking system.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking; Growth; Institutions; MENA
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

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