Role of Private Commercial Banks in Accelerating the Economic Growth of Bangladesh

Abstract

Economic growth is the single most contributory matter in the economic development process. Economic growth unpretentiously determines the economic wellbeing of any country. Economic growth portrays the performance of an economy. Growth ensures the utilization of natural resources, expansion of productive services, creation of employment opportunities and better standard of living. Bangladesh economy is growing at an impressive pace. Economic environment of Bangladesh is highly optimistic and projected growth of gross domestic product (GDP) is robust. Behind the satisfactory growth rate, the financial system of Bangladesh has contributed among other factors. The financial system and economic system of a country are inseparably linked. The performance of the system determines the status of the economy. In many countries including Bangladesh, commercial banks dominate financial system. But for the last few years, banking sector of Bangladesh is passing critical time. In this critical time, the performance of private commercial banks (PCBs) is satisfactory among the scheduled banks. In future, acceleration of economic growth will take place along with greater capital accumulation for which PCBs have to maintain their efficiency level for promoting growth. Hence, the significance of the role of PCBs is immense for economic growth. The study has conducted an in-depth review of the existing theoretical and empirical literatures critically and discovered a significant gap in the problem area. Despite notable studies on economic growth, relation between financial system and economic growth, and commercial bank no specific attempt has been made to focus the role of PCBs to economic growth acceleration in Bangladesh. There exists a mentionable space in identification of the Demand Following or the Supply Leading hypothesis for Bangladesh economy. A gap in examination of economic growth of Bangladesh has also been noticed. Hence, the study aims at the examination of the role of PCBs to accelerate economic growth, investigation of the pattern of economic growth and detection of Supply Leading or Demand Following hypothesis in Bangladesh. To investigate the role of PCBs in accelerating the economic growth of Bangladesh, the study has proposed a model after reviewing the literature critically. The model has detected the dependent and independent variables and uncovered the interactions among the variables. The variables, i.e., nominal GDP, real GDP and per capita nominal GDP resemble economic growth and has been considered as dependent variables. To portray the role of PCBs, the model has considered net loan and advances of PCBs, investment by PCBs, export earnings by PCBs, number of branches of PCBs, total income of PCBs and non-performing loan of PCBs as independent variables. Finally, the study has derived seven hypotheses from the model. The present study is causal in nature as the purpose is hypotheses testing and has exposed properties of scientific approach ‘Hypothetico-Deductive’. As the purpose of the study is to analyze the role of PCBs, the population consists of all PCBs. The study has conducted the nonprobability sampling design particularly the judgement sampling technique. Due to unavailability of data, the sample size (38) of this study is all PCBs except ICB Islami Bank Ltd. and Simanto Bank Ltd. The study has required quantitative information from secondary source. To meet the objectives, time series data have been required. The study has covered a period of 34 years i.e., 1984 to 2017. Data analysis of this study is econometric in nature. A constructive role of PCBs to accelerate economic growth has been hypothesized. Before estimation of the proposed model, stationarity test has been conducted. The decision whether the variables are stationary or nonstationary at level and difference form, the widely used Augmented Dickey-Fuller (ADF) test along with Dickey-Fuller and graphical tests have been applied. The study has proceeded based on the findings of ADF test as it is widely recognized test of unit root. The variables, nominal GDP, real GDP and per capita nominal GDP, net loan and advances of PCBs, investment by PCBs, export earnings by PCBs are stationary at 1st difference, i.e., I(1) at 95% confidence interval. The variables, number of branches of PCBs, total income of PCBs and non-performing loan of PCBs are stationary initially I(0). The selection of ARDL model has followed the results of stationarity diagnostic. The ARDL model has been applied to the three measures of economic growth, i.e., nominal GDP, real GDP and per capita nominal GDP. The reason behind the estimation using three measures is to detect the true impact and role of PCBs to economic growth. As, detection is not error free, 5% level of significance has been accepted in measurement process. However, in the three estimated ARDL models, the optimal lag has been selected applying mostly used criteria viz; AIC and SBC. The values of AIC in the three ARDL models were lowest among top 20 models. Cointegration has been checked by bounds test. The models were free from serial correlation. The study has satisfied with the models as those were homoscedastic in nature and the residuals are normally distributed. The models were free from misspecification. So, the models were correctly specified and stable. The results have revealed long run association between economic growth and private banking functions. The long run coefficients of net loan and advances, export earnings by PCBs and banks’ investment are statistically significant to economic growth for all three models. The variables, number of branches, net loan and advances, export earnings of PCBs, investment by PCBs at one year lag, have been observed to influence the current year’s per capita GDP. In the long run, real GDP and per capita nominal GDP have been influenced by previous year’s values. PCBs have significant contribution to economy in the short run. The estimated three models have supported the view of slow adjustment to long run equilibrium due to any shock in the short run. The recovery to long run stability has proceeded slowly. Economic growth has been hurt despite smooth support of PCBs. Any shock in current year has impeded the cointegration of PCBs and economic growth in succeeding years. The study has recommended policies both for the contributory and noncontributory functions of PCBs. A decade-wise investigation has been conducted for three conventional measures of economic growth namely nominal GDP, real GDP and per capita Nominal GDP. To investigate the pattern of economic growth, time series graphs have been drawn. To disclose the trend, linear trend models have been estimated. The study has revealed positive trend of nominal GDP, real GDP and per capita GDP over the decades. Economic growth in Bangladesh is on an increasing path and remarkably stable. The positive trend of nominal GDP, real GDP and per capita GDP has proved the national endeavors despite the impediments to growth in different decades. The study has suggested policies to augment economic growth in future. The study has applied the Granger Causality test to detect existence of either the Demand Following or the Supply Leading hypothesis. It has estimated the pair-wise regressions for three dependent variables and six independent variables. The causality test has revealed a mixture of Demand Following and Supply Leading hypothesis between the development of PCBs and economic growth. The study has recommended that measures should be taken to develop PCBs and economy proportionally.