cranfield university ali j. al-moulani banking sector depth & long-term economic growth in the gcc

427 Pages·2016·21.22 MB·English

CRANFIELD UNIVERSITY

ALI J. AL-MOULANI

BANKING SECTOR DEPTH & LONG-TERM ECONOMIC GROWTH
IN THE GCC STATES: RELATIONSHIP NATURE, SECTOR
DEVELOPMENT STATUS & POLICY IMPLICATIONS

SCHOOL OF MANAGEMENT
International Executive Doctorate

DBA
Academic Year: 2012 - 2016

Supervisor: Dr. Constantinos Alexiou
May 2016
CRANFIELD UNIVERSITY

SCHOOL OF MANAGEMENT
International Executive Doctorate

DBA

Academic Year 2012 - 2016

ALI J. AL-MOULANI

Banking Sector Depth & Long-Term Economic Growth in the GCC States:
Relationship Nature, Sector Development Status & Policy Implications

Supervisor: Dr. Constantinos Alexiou
May 2016

This thesis is submitted in partial fulfilment of the requirements for the
degree of Doctor of Business Administration

© Cranfield University 2016. All rights reserved. No part of this
publication may be reproduced without the written permission of the
copyright owner.
ABSTRACT
The thesis investigates the nature of the relationship between the banking sector depth
and long-term economic growth in the Gulf Cooperation Council (GCC) States,
assesses the banking sector development status in each of the States, and underlines the
policy implications in the light of the banking-growth nexus and the banking
development benchmarking models’ findings for the region by undertaking three
projects.

The thesis examines the nature of the relationship between banking sector depth and
long-term economic growth in the NRBC—as a proxy for the GCC States— vis-à-vis
the rest of the world countries. For the empirical investigation, a dynamic panel data
approach, i.e. Generalised Method of Moments (GMM), is adopted over the period
1961 to 2013. By utilising mixed effects and System GMM frameworks, the research
identifies the countries with the strongest banking-growth relationships and establishes
the banking sector development determinants in those countries. Employing a novel
benchmarking process, the thesis assesses the status of the banking sector development
in each of the GCC member countries and simulates the change in the banking sector
depth across the Gulf region over a period of ten years to highlight the potential policy
implications for the sector development.

The findings of the thesis suggest that the relationship between banking sector depth
and long-term economic growth in the NRBC is non-linear, where the relationship
between the banking sector depth and economic growth turns from positive to negative
beyond certain levels of sector depth. In comparison to other countries, the results
indicate that the banking-growth nexus in the NRBC exhibits a smaller total effect
magnitude as well as a shorter time between the change in the sector depth and its effect
on economic growth. The benchmarking of the banking sectors in the GCC region
suggests that in five of the six member countries the banking sectors are
underdeveloped. The simulation results predict that the banking sectors will develop
further in half of the countries in the region, given their current levels of banking sector
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development determinants, while two countries require reforms in terms of undertaking
regulations and policies to avoid seeing their sector development levels deteriorate.

The thesis contributes to theory by confirming findings in the literature and expanding
the body of knowledge through novel findings. This research also contributes to policy
by demonstrating the significance of the banking sector development for long-term
economic growth in the NRBC, providing policymakers in the Gulf States with the
status of their banking sectors, and underlining the banking sector depth determinants
that ought to be considered when setting regulations and policies that are aimed at
developing the banking sector further.

Keywords:
Finance-Growth Nexus, Banking Sector Development Benchmarking, Banking Depth
Determinants, Natural Resource-Based Countries, Generalised Method of Moments

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ACKNOWLEDGEMENTS
My doctorate research journey would have not been completed without the support,
encouragement, and inspiration of kind people around me that I would like to mention
here.

First is my dear wife Roza for being my inspiration in life to excel and achieve our
goals. She as well as my treasured children—Khalid, Mariam and Jood—were generous
to offer me precious time and space from our busy family life to undertake this research
over the last four years.

My thanks go also to my kind parents for all their encouragement and support
throughout my life to help me become the person I am today.

I would like to express my deepest gratitude to my supervisor, Dr. Constantinos
Alexiou, for being my mentor in this journey. Indeed without his invaluable guidance,
tuition and feedback this thesis would have not been completed.

My appreciation is extended to my supervisory panel, Professor Joe Nellis, Dr. Catarina
Figueira and Dr. Heather Skipworth, for offering their constructive comments and
directing the overall research.

I would like to thank the 2012-2016 DBA Cohort and Cohort Leader for the exceptional
experiences we had during the cohort weeks at Cranfield, for sharing their knowledge,
experiences and views to improve the quality of work we produce, and for standing by
each other during challenging times.

I extend my sincere appreciation to Professor Emma Parry, the Director of the DBA
programme, for ensuring that we have received all the required support to successfully
complete the programme. I would also like to truly thank the Student and Academic
Support team for their indispensable assistance before and throughout the programme. I
particularly owe Alison Wilkerson for putting my application through for the DBA
programme just in time during the summer of 2012.

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Over the last four years, we have acquired the knowledge and skills required to publish
scholarly research thanks to the faculty and the area experts at Cranfield University. I
would like to mention Professor Donna Ladkin and Dr Noeleen Doherty for inspiring us
to become better writers, critical readers and, in certain aspects, philosophers.

Last but not least, I extend my sincere gratitude to Heather Simpkins for spending hours
reviewing this thesis to ensure it is free from spelling and grammatical mistakes.

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TABLE OF CONTENTS
ABSTRACT ...................................................................................................................... i
ACKNOWLEDGEMENTS ............................................................................................. iii
LIST OF FIGURES ......................................................................................................... xi
LIST OF TABLES ......................................................................................................... xiii
LIST OF APPENDIX FIGURES .................................................................................. xix
LIST OF APPENDIX TABLES .................................................................................... xxi
LIST OF EQUATIONS ................................................................................................ xxv
LIST OF ABBREVIATIONS .................................................................................... xxvii
Linking Document ....................................................................................................... 1
1 Introduction ................................................................................................................... 1
2 Research Process, Methods & Findings ........................................................................ 4
2.1 Overarching Research Objectives & Questions ..................................................... 4
2.2 Summary of the Research Process .......................................................................... 5
2.3 Scoping Study & Research Projects: Selected Methods & Key Findings .............. 6
2.3.1 Scoping Study .................................................................................................. 6
2.3.1.1 Economic Structure & Financial Development in the Gulf States ........... 6
2.3.1.2 Literature Review ..................................................................................... 8
2.3.1.3 Rationale for Economic Diversification ................................................... 9
2.3.1.4 Areas for Further Research ....................................................................... 9
2.3.2 Project I: A Systematic Literature Review .................................................... 10
2.3.2.1 Research Method & Design .................................................................... 10
2.3.2.2 SLR Findings: Review Question I .......................................................... 11
2.3.2.3 SLR Findings: Review Question II ........................................................ 13
2.3.3 Project II: An Empirical Investigation of the Finance-Growth Nexus .......... 14
2.3.3.1 Research Method & Design .................................................................... 15
2.3.3.2 Key Findings ........................................................................................... 16
2.3.4 Project III: Empirical Analyses of the Banking Sector Depth Determinants &
Status ...................................................................................................................... 18
2.3.4.1 Research Method & Design .................................................................... 18
2.3.4.2 Key Findings ........................................................................................... 19
3 Discussion of the Findings .......................................................................................... 22
3.1 Findings in Relation to the Literature ................................................................... 22
3.2 A Discussion of the Findings’ Significance ......................................................... 27
3.2.1 Stimulating Economic Growth in the NRBC ................................................ 27
3.2.2 Diversifying the Economies & Preserving the Living Standards in the GCC28
4 Contribution to Theory ................................................................................................ 30
5 Policy Implications ...................................................................................................... 34
6 Further Research & Study Limitations ........................................................................ 37
6.1 Further Research ................................................................................................... 37
6.2 Study Limitations ................................................................................................. 40
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Project I - Banking Sector Development & Economic Growth in the GCC: A
Systematic Literature Review ................................................................................. 43
Abstract ........................................................................................................................... 45
1 Introduction ................................................................................................................. 45
2 Finance-Growth Nexus ................................................................................................ 49
2.1 Financial Development Promotes Economic Growth .......................................... 49
2.2 Financial Development is Irrelevant for Economic Growth ................................ 51
2.3 The Dark Side of Financial Development ............................................................ 51
2.4 Optimal Level of Financial Development ............................................................ 53
3 Methodology ................................................................................................................ 54
3.1 SLR Approach ...................................................................................................... 54
3.2 Basis for Selecting the SLR Approach ................................................................. 55
3.3 SLR Protocol ........................................................................................................ 56
3.3.1 Review Objectives & Questions .................................................................... 56
3.3.2 Review Panel ................................................................................................. 56
3.3.3 Search Strategy .............................................................................................. 57
3.3.3.1 Keywords ................................................................................................ 58
3.3.3.2 Search Strings ......................................................................................... 58
3.3.3.3 Search Engines & Databases .................................................................. 60
3.3.3.4 Cross Referencing ................................................................................... 61
3.3.4 Selection Criteria ........................................................................................... 61
3.3.5 Quality Appraisal ........................................................................................... 64
3.3.6 Data Extraction .............................................................................................. 66
3.3.7 Data Synthesis ............................................................................................... 68
4 SLR Findings ............................................................................................................... 68
4.1 Review Question I ................................................................................................ 68
4.1.1 Introduction ................................................................................................... 68
4.1.2 RQ I Findings ................................................................................................ 70
4.1.2.1 Studies included in the SLR ................................................................... 70
4.1.2.2 A Critical Review of the Findings .......................................................... 78
4.1.2.2.1 Financial Development & Economic Growth are Positively
Associated ....................................................................................................... 79
4.1.2.2.2 Positive Relationship with Causality Running from Finance to
Growth ............................................................................................................ 85
4.1.2.2.3 Positive Relationship with Growth leading Finance ....................... 88
4.1.2.2.4 Positive Relationship with Bidirectional Causality ......................... 89
4.1.2.2.5 Positive Relationship with Mixed Causality Results ....................... 91
4.1.2.2.6 Financial Development & Economic Growth are Negatively Linked
........................................................................................................................ 94
4.1.2.2.7 Negative Relationship with Mixed Causality Results ..................... 99
4.1.2.2.8 No Relationship Between Financial Development & Economic
Growth ............................................................................................................ 99
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4.1.2.3 Findings Synthesis ................................................................................ 101
4.1.3 Evaluation of Findings ................................................................................ 103
4.1.4 Discussion & Further Research ................................................................... 105
4.2 Review Question II ............................................................................................. 108
4.2.1 Introduction ................................................................................................. 108
4.2.2 RQ II Findings ............................................................................................. 110
4.2.2.1 Studies included in the SLR ................................................................. 110
4.2.2.2 A Critical Review of the Findings ........................................................ 120
4.2.2.2.1 Bank Efficiency & Productivity .................................................... 123
4.2.2.2.2 Bank Profitability & Performance ................................................. 130
4.2.2.2.3 Bank Market Concentration & Competition ................................. 138
4.2.2.2.4 Other Banking Sector Studies ........................................................ 145
4.2.2.3 Findings Synthesis ................................................................................ 152
4.2.3 Evaluation of Findings ................................................................................ 156
4.2.4 Discussion & Further Research ................................................................... 159
5 Discussion .................................................................................................................. 163
5.1 Banking Development & Economic Growth Relationship ................................ 163
5.2 Banking Development & Economic Diversification .......................................... 164
6 Further Research ........................................................................................................ 166
7 Conclusion ................................................................................................................. 168
Project II - Banking Sector Depth & Economic Growth Nexus: A
Comparison between the Natural Resource-Based & the Rest of the
World’s Countries .................................................................................................... 171
Abstract ......................................................................................................................... 173
1 Introduction ............................................................................................................... 173
2 Literature Review ...................................................................................................... 177
2.1 Cross-Country Analysis Studies ......................................................................... 178
2.2 Time Series Analysis Research .......................................................................... 180
2.3 Panel Data Models Studies ................................................................................. 181
2.4 Research with Several Methods & Recent Trends ............................................. 183
2.5 Literature Development ...................................................................................... 186
2.6 Areas for Further Research in the Literature ...................................................... 187
3 Data & Variables ....................................................................................................... 188
3.1 Dependent Variables ........................................................................................... 189
3.2 Independent Variables ........................................................................................ 190
3.3 Controlling Variables ......................................................................................... 191
3.4 Statistical Analysis of the Banking Sector Depth Measures .............................. 191
4 Hypotheses and Methodological Framework ............................................................ 193
4.1 Statement of Hypotheses .................................................................................... 194
4.2 Generalised Method of Moments ....................................................................... 195
4.3 Specification of the Econometric Model ............................................................ 202
4.4 Research Process ................................................................................................ 203
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4.5 Research Reliability and Validity ....................................................................... 204
5 Results ....................................................................................................................... 206
5.1 Banking Sector Depth & GDP Growth .............................................................. 207
5.2 Banking Sector Depth & GNI Growth ............................................................... 213
5.3 Banking Sector Depth & Investment .................................................................. 218
5.4 Results Synthesis ................................................................................................ 225
5.4.1 Synthesising the Relationship Type ............................................................ 225
5.4.2 Synthesising the Relationship Time Lag ..................................................... 227
5.4.3 Synthesising the Relationship Magnitude ................................................... 229
6 Discussion .................................................................................................................. 234
6.1 Results in Relation to the Literature ................................................................... 234
6.2 Implications for the GCC & the NRBC .............................................................. 241
6.3 Contribution to the Literature & Policy .............................................................. 242
6.4 Research Relevance & Limitations .................................................................... 243
7 Further Research ........................................................................................................ 245
8 Conclusion ................................................................................................................. 248
Project III - The Status & Determinants of the Optimal Banking Sector
Depth for Long-Term Economic Growth in the GCC States ........................ 251
Abstract ......................................................................................................................... 253
1 Introduction ............................................................................................................... 253
2 Literature Review ...................................................................................................... 257
2.1 Determinants of Banking Sector Development .................................................. 258
2.1.1 Legal Systems & Origins ............................................................................. 258
2.1.2 Institutions ................................................................................................... 259
2.1.3 Political Economy ....................................................................................... 260
2.1.4 Geographical Endowment ........................................................................... 262
2.1.5 Social Capital & Culture ............................................................................. 262
2.1.6 Financial Repression, Regulations & Inflation ........................................... 263
2.1.7 Trade & Capital Account Liberalisation ..................................................... 264
2.2 Benchmarking Banking Sector Development .................................................... 265
2.2.1 Theoretical Studies ...................................................................................... 265
2.2.2 Empirical Studies ......................................................................................... 267
2.3 Literature Development ...................................................................................... 269
2.4 Areas for Further Research ................................................................................. 270
3 Data & Variables ....................................................................................................... 272
3.1 Variables Associated with Finance-Growth Nexus Models ............................... 272
3.2 Measures Employed in the Banking Sector Depth Determinant Models ........... 273
3.2.1 Banking Sector Depth Ratios ...................................................................... 273
3.2.2 Banking Stability, Efficiency & Competition Measures ............................. 274
3.2.3 Macroeconomic & Demography Variables ................................................. 275
3.2.4 Governance, Institutional & Legal Indicators ............................................. 277
3.3 Statistical Analysis ............................................................................................. 279
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