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Journal of Finance & Economics Research - Volume 6, Issue 1 2021
By Ahmad T. Al-Harbi
10.20547/jfer2106102
Keywords: Banks' performance, Economic growth, GMM.
The aim of this paper is to study the nexus between banks' characteristics and economic growth in developing/underdeveloped countries that are members of the Organization of Islamic Cooperation (OIC). This paper applies a dynamic panel model for all conventional banks operating in OIC countries for the period 1989-2008. The main finding of the study is that banks' loans foster economic growth in the long run. In addition, banks' deposits, liquidity, foreign ownership, and size have a positive impact on economic growth and the results are significant at 1\% level. Similarly, stock market development and money supply play a vital role in economic growth in developing/underdeveloped countries (1\% level). In contrast, banks' concentration, deposit insurance scheme and real interest rate hamper economic growth (1\% level). It is worth mentioning that money supply growth and stock market development are the most contributing factors to economic growth followed by banks' deposits. According to the best of the authors' knowledge, this is the first paper that examines the relation between banks' performance and economic growth in OIC countries, 54 states, using Generalized Method of Moments (GMM) as the estimation method and for elongated period (20 years).