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Role of Financial Institutions in Economic Growth: A Case of Nepal
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This paper examines short-run and long run causal relationship between financial institutions and economic growth of Nepal. The gross domestic product (GDP), financial system deposit (FSD), credit to government and state owned enterprises (CGSOE), domestic credit to private sectors (DCPS) and gross national expenditure (GNE) have been used to find the causal relationship between financial institutions and economic growth using granger causality (GC) test, Johnson co-integration test, vector error correction model (VECM) and Wald test statistics. The VECM suggests for the validity of long run association among the variables of GDP, CGSOE, DCPS and GNE. The Wald test statistic also finds short run joint effects of independent variables to dependent variables-GNE but in the case of dependent variable GDP, there is no short run joint effect. The study shows that there is a long-run association between financial institutions and economic growth of Nepal. A well-developed financial system facilitates for economic growth of nation in long run. The regulatory authority should accelerate financial efficiency that may facilitate to stimulate adequate capital formation and investment in productive sectors.
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... A robust banking system aids the development of the country's economy. By identifying and funding profitable business opportunities, financial institutions permit the addition of dispersed capital and promote investment (Dhungana, 2019). The banking industry fuels economic expansion by providing capital for profitable investments. ...
... The financial sector is the economic pillar that makes it possible to generate continuous economic growth through effective financial intermediation. Economic growth necessitates a modern and stable financial system to pool and utilize financial resources, lower costs, and risks, expand, and diversify opportunities, improve resource efficiency, boost productivity, and facilitate economic growth (Dhungana, 2019). MFIs are essential to economic activity in rural areas. ...
This research aims to empower Nepalese and Bangladeshi microfinance institutions (MFIs) to strengthen their microfinance governance. By contrasting the governance structures of MFIs in Bangladesh and Nepal, the study focuses on the corporate governance aspect of MFIs for sustainability. This study adopted an interpretive methodology and a qualitative research design. Internal control, timely internal audit, proper rules and regulations, institutional culture, full compliance with rules and regulations, budget and annual plan review, financial transparency, and board literacy education are the main dimension of corporate governance, broadly influencing MFIs for sustainability. The study found sustainability of MFIs is affected by proper guidelines for operation, effective internal control mechanisms, professional management, board literacy education, financial transparency, the rule of law in operation, institutional culture, and review of budget and achievement. The findings of the study might be applicable to the BFIs, MFIs, regulatory authorities, economist, HR analyst, and planners.
... Financial institutions assist to gather dispersed capital and stimulate investment by recognizing and funding profitable company prospects (Demirgüç-Kunt & Levine, 2009). Dhungana (2019) explores the short-run and long-run causal link between financial institutions and the economic development of Nepal. The research demonstrates a longrun link between financial institutions and the economic progress of Nepal. ...
... The research demonstrates a longrun link between financial institutions and the economic progress of Nepal. A well-developed financial system enables the economic prosperity of the country in long term (Salami &Oluseyi, 2013;Dhungana, 2019). The regulatory authority should expedite financial efficiency which may allow for boosting enough capital creation and investment in productive sectors. ...
The emergence of the financial market favorably influences the economy. The choices of an individual engaging in the financial market have a crucial part in setting the market trend, which subsequently affects the economy. This research seeks to examine the variables impacting the investment choices of people functioning in financial and non-financial sectors. The research employs a social survey design, based on 280 samples obtained by a structured questionnaire employing a convenience sampling approach. The study was restricted to the Pokhara metropolitan city of Nepal. Descriptive Statistics, Chi-square test, t-test, ANOVAs, Confirmatory Factor Analysis and Structural Equation Modeling were utilized to fulfill the study goals. The study demonstrates that there is no substantial difference between personnel working in the financial and non-finance industries on herding, market, heuristic and demographic component. However, people working in the financial industry examine more economic aspects and the total investment performance is greater for employees working in the financial sector. Further, the research reveals that self-confidence, market information, the recommendation of professionals, minimization through portfolio diversification and high-income level increases in interest in investment were the significant influential factors affecting investment decisions of an employee working in financial and non-financial institutions. The CFA establishes a significant link between observable variables and their fundamental constructs. The path analysis demonstrates that Market, Herding, Knowledge and Economic factors has a favorable influence on investment choices. The regulatory authority and related institutions should equip investors in respect of both economic and behavioral elements to make a smart investment choice.
... As discussed in Dhungana (2019), the history of Nepalese banking sector is not very old as the first commercial bank, Nepal Bank Limited was just established in the year 1937 and the country's central bank, Nepal Rastra Bank in 1956. It is only after the liberalization of the economy since mid 1980s the financial sector started making progress in size, number and outreach. ...
... So, both financial sector and security market can be considered to actually take off after mid 1980s with the embracement of liberal policies and financial structural changes. Nepalese studies have also found that financial sector influence the economic growth (Paudel and Acharya, 2020;Dhungana, 2019;Bist and Bista, 2018;Gautam, 2015;Rimal, 2014; and likewise there are evidences that stock market development have significant contribution to the economic growth (Bist, 2017;Regmi, 2012;G.C. and Neupane, 2006). ...
This paper empirically examines the complement or substitute relationship between Nepalese financial sector and stock market using annual data from 1988 till 2019. The time series data underwent unit root tests without structural breaks employing Dickey Fuller-GLS and Philips-Perron tests followed by tests of unit root with structural break using Zivot and Andrew (1992) model. The ARDL approach to co-integration in the presence of one structural break was employed to analyze the long-run relationship. The results reveal that there exists bidirectional causal relationship between financial sector development and stock market development in the short-run. However in the long-run it is the stock market development that significantly causes financial sector development. The significant positive relationship between financial intermediary indicator (credit-to-private sector) and stock market development indicator (market capitalization ratio) reveal that financial sector development and stock market development are complementary to each other both in the short-run and in the long-run. Saving rate is observed to have important role in determining stock market development whereas investment and inflation are found influencing to determine financial sector development.
... A modern and healthy financial system is required for accelerated economic growth to pool and utilize financial resources, reduce costs and risks, expand and diversify opportunities, enhance the efficiency of resources, promote productivity, and facilitate economic growth (Dhungana, 2019;Hasan et al., 2009). Therefore, the financial system needs to be structured on the grounds of international norms and practices that help to develop a strong financial foundation in the country (Jeucken, 2001;Ozili, 2021). ...
Liquidity crunches in the Nepalese banking sector have been a critical issue for the last few years. This research aims to examine the causes, consequences, and improvement of liquidity crunches in the context of the Nepalese banking industry. This study is based on primary sources with explanatory and descriptive research design. The study population is all the bankers and experts involved in the banking sector - commercial banks, development banks, and regulatory authorities of Pokhara Metropolitan City, Kaski, Nepal. The five-point Likert scale questionnaires were developed to collect the data from the 213 banking professionals based on the non-probability sampling method. This study found a significant impact of government capital expenditure, bank lending policy, and monetary policy on liquidity crunches in the banking industry. The liquidity crunch hampers the growth of business and industry, and discourages entrepreneurs because they are not getting loanable funds as and when required. It creates instability in the financial system, deteriorates the investment environment, generates high inflation and unemployment rates , and affects economic growth rate in the country. The government should increase capital expenditure capacity. Bank lending policy should be directed towards a productive investment. Appropriate monetary policy should be designed to address the liquidity crunch problem in the banking sector. For this, the government and regulatory authority may promote an inclusive and sound financial system in the nation.
... The FED variable is widely used in the literature to measure the level of financial development (e.g. Dhungana, 2019;Ozili and Ndah, 2021). Well-developed financial systems often experience high levels of financial inclusion due to the absence of market and non-market barriers in accessing basic financial services (Allen et al., 2014). ...
This study investigates the impact of terrorism on financial inclusion that is achieved through ATM penetration and bank branch expansion. Eight countries that are the most terrorized countries in the world were analysed using the panel fixed effect regression model and the generalized linear model. The results provide evidence that terrorism reduces the level of financial inclusion in countries experiencing terrorism, but the presence of strong legal institutions, accountability governance institutions and political stability governance institutions mitigate the adverse effect of terrorism on financial inclusion.
... The FED variable is widely used in the literature to measure the level of financial development (e.g. Dhungana, 2019;Ozili and Ndah, 2021). Well-developed financial systems often experience high levels of financial inclusion due to the absence of market and non-market barriers in accessing basic financial services (Allen et al., 2014). ...
Purpose
This study aims to investigate the impact of terrorism on financial inclusion that is achieved through automated teller machine penetration and bank branch expansion.
Design/methodology/approach
Eight countries that are the most terrorized countries in the world were analysed using the panel fixed effect regression model and the generalized linear model.
Findings
The results provide evidence that terrorism reduces the level of financial inclusion in countries experiencing terrorism, but the presence of strong legal institutions, accountability governance institutions and political stability governance institutions mitigate the adverse effect of terrorism on financial inclusion.
Originality/value
A growing literature has shown that terrorism affects the economy, yet little is known about its impact on financial inclusion.
... The financial sector is an economic growth engine as it is critical in allocating resources and promoting economic activities (Caporale et al., 2015;King & Levine, 1993;Schumpeter, 1934). Well-developed financial institutions promote capital formation and develop a productive business environment in the economy (Dhungana, 2019;Greenwood & Smith, 1997;Habibullah & Eng, 2006;Levine & Zervos, 1998). The expansion of the financial sector contributes to the economic growth of a nation through the effective utilization of accumulated funds in productive sectors (Hao, 2006;Levine, 1997). ...
Background: Understanding the elements and variables influencing a decision is crucial for making the best financial decisions possible. Investors make complex decisions using their instincts, perceptions, emotions, and thought processes.
Objectives: This paper aims to examine the effect of market variables on investment decisions concerning the financial market of Nepal.
Methods: The research used primary sources of data collected through structured questionnaires. The researchers have applied purposive sampling techniques and selected 168 respondents who have been involved in the transaction of the secondary financial market for at least one year in the Nepalese stock market. We used descriptive and explanatory research design, including correlation analysis and multiple linear regression model, to analyze the data with the help of statistical software.
Results: Young people from a new generation are becoming an increasingly large portion of the capital market and are actively participating in the Nepali security market. The study finds that the stock’s price, customer preferences, past stock trends, and market information in the secondary market highly impacts investment decision. However, the company’s fundamental report has no significant impact on investment decisions in the secondary market.
Conclusion: Investors need to understand the financial landscape of the country prior to investing. Policymakers should understand the behavior of investors to promote the secondary market, and proper market information should be disclosed that may help to make better investment decisions in the secondary market.
... ADB/N has now become a commercial bank. Following the adoption of the economic liberalization policy in Nepal, the financial sector has made tremendous progress in terms of the number of banks and financial service clients (Dhungana, 2019). ...
This study aims at finding how Nepalese banks and financial institutions (BFIs) struggle at managing liquidity to stabilize financial performance for the nation’s economic sustainability. Investigating the relationship between liquidity management and economic stability remains as sole purpose to ensure the Nepalese economy. This study applies the qualitative research design and aims to explore the liquidity management of Nepalese BFIs with an interpretative approach. The economic and financial stability of the country can be accomplished through adequate and proper liquidity management in BFIs. The loanable fund is easily available in the banking sector that vibrates on economic activities including production, distribution, transportation, advertising, communication, exports, and job creation, consequently affecting the total economic activities. Based on the findings, the current scenario of liquidity crisis can be minimized through appropriate financial instruments, monetary policies, an increase in the export of goods, and discouraging the import of luxury items. Remittance is a major source of foreign currency in Nepal, and government needs to encourage people to send remittances through formal banking channels. Equally, the government needs to increase the spending capacity of budgeted capital expenditure on time. Policymakers, economists, microfinance practitioners, Banks, financial institutions (BFIs), and regulatory authorities are expected to be benefitted from the conclusions of the study.
Microfinance institution (MFI) deliquency management is a new topic in the world of microfinance. The major goal of the article is to examine at delinquency management strategies in MFIs in Nepal, as well as the causes of loan delinquency and how to improve loan delinquency. The study’s goal necessitated an evaluation of relevant literature. In Nepal, the ratio of non-performing loans (NPLs) in the microfinance sector has been rising. The study found that adopting governance in loan delivery procedures, client identification, effective credit appraisal, and review of client credit history, professional knowledge of clients, client literacy, and identification of clients over indebtedness, credit monitoring and controls, and loan utilization can reduce MFI delinquency. The aim of this research is to help MFIs improve the quality of their loan portfolios. It shows that institutionally efficient MFIs may be able to meet both their social and financial goals. The conclusions of this article will aid MFIs in reducing NPL and better managing delinquency.
Background: Behavioral finance deals with the study of psychological influences on investors and financial markets. Investors commonly perform investment analysis through fundamental and technical analysis. The behavior of the investment market originates from the principles of psychological decision-making that explains the reasons behind buying and selling stocks. Objectives: This paper aims to examine the effect of cognitive biases on investment decisions in Pokhara Valley, Nepal. The effect of five cognitive biases, such as availability, anchoring, overconfidence, herd instinct, and regret aversion, is measured on rational investment decision-making. Methods: This study is based on primary data sources using non-probability (convenience method) sampling techniques. There are seven brokerage houses in Pokhara valley, and researchers selected 179 respondents involved in stock market investment. Both descriptive and inferential analyses were made to analyze the data. Results: The study discovers a link between irrationality in financial decision-making and availability, overconfidence, and herd instinct biases, but anchoring and regret aversion biases had no effect on irrational investment decisions. However, though all the biases have a positive relationship with an irrational investment decision, overconfidence bias has the highest impact. Regret aversion bias has the least impact on investment decisions in comparison to the other four biases. Conclusion: The investors and the policymakers should focus on finding the cognitive biases and various de-biasing methods to eradicate those biases throughout investment decision-making. The findings of this study have a number of implications for investors, brokers, and governments who aim to stimulate stock market investment.
This paper compared the efficiency of IPO pricing mechanisms namely Fixed Price (FP) and Book-Building (BB) in China by analyzing IPOs' underpricing level. Findings include (1) the FP regime was more efficient than the BB one because the BB did not reduce the underpricing level in China as expected; and (2) reasons for this were (i) information transparency of the BB has not reduced other external effects, for example, impacts of some firm quality and ex-ante uncertainty proxies were still tight or even stronger since 2005; and (ii) investors were optimistic toward market conditions as higher quality underwriters invited in the BB procedure as well as the fact that underwriters often lowered offer price after collecting information from the BB process, which made the underpricing level rise.
In this paper, a high frequency and dynamic pairs trading system is proposed, based on a market-neutral statistical arbitrage strategy using a two-stage correlation and cointegration approach. The proposed pairs trading system was applied to equity trading in U.S. equity markets in any type of market cycle condition to capture statistical mispricing between the prices of each stock pair based on its residuals and to model the stock pairs naturally as a mean-reversion process. The proposed pairs trading system was tested for out-of-sample testing periods with high frequency stock data from 2012 and 2013. Our trading strategy yields cumulative returns up to 56.58% for portfolios of stock pairs, well exceeding the S&P 500 index performance by 34.35% over a 12-month trading period. The proposed trading strategy achieved a monthly 2.67 Sharpe ratio and an annual 9.25 Sharpe ratio. Furthermore, the proposed pairs trading system performed well during the two months in which the S&P 500 index had negative returns. Thus, the trading system might be especially more profitable at times when the U.S. stock market performed poorly. Therefore, the performance returns of the proposed pairs trading system were relatively market-neutral and were positive regardless of the performance of the S&P 500 index.
This research will focus on the relationship between strategic commodities (namely oil and gold prices) and the Islamic stock market in Malaysia. The objective of this research is to analyze the dynamic effects of oil price and gold price changes on the Islamic stock market in Malaysia using an estimation of the Vector Auto Regression (VAR) method. The variables involved in this research are Crude Oil Price (COP), Kijang Gold Price (KGP), and FTSE Bursa Malaysia Emas Shariah Index (FBMES). Using data covering the period from January 2007 to December 2011, the study applies the co-integration analysis, Granger causality test, Impulse Response Function (IRF) and Variance Decomposition (VDC) analysis. The findings show that Islamic stock returns were not co-integrated with strategic commodities in the long run. From the Granger causality viewpoint, it was observed that there was a bi-directional causality relationship between Islamic stock returns with oil prices. On the other hand, the FBMES was not affected by the gold prices or vice versa. Therefore, it can be concluded that, among strategic commodities, only oil’s price variables will affect the Islamic stock return in the short run in Malaysia. This proves that the Kijang Gold Price is not a valid variable for the purpose of predicting changes in Islamic share prices.
Numerous studies have examined the return correlation among different markets and the relationship between stock returns and trading volume. However, the impact of trading motives on the dynamic relationship between stock returns and trading volume especially in emerging markets is still vague and fragmented. Therefore, this study aims to examine the impact of trading motives on the dynamic relationship between stock returns and trading volume in Egypt by using the daily data of all listed 167 stocks traded in the Egyptian Exchange (EGX) for a period of 6 years, from January 2006 till December 2011. We used the model of Liorenate, Michaely, Saar and Wang (2002) {LMSW model} that utilizes information in volume return dynamics of individual stocks and show that bid-ask spread-which is used as asymmetric information proxy-can explain the extent of speculative trade across firms traded in the Egyptian Exchange. We found evidence supporting the notion that speculative trade is dominant in emerging markets and is also associated with positive serial autocorrelation in stock returns.
Key accomplishments of political corporate social responsibility (CSR) scholarship have been the identification of global governance gaps and a proposal how to tackle them. Political CSR scholarship assumes that the traditional roles of state and business have eroded, with states losing power and business gaining power in a globalized world. Consequently, the future of CSR lies in political CSR with new global governance forms which are organized by mainly non-state actors. The objective of the paper is to deepen our understanding of political CSR and reintegrate notions of state power into political CSR scholarship by highlighting how states (1) set the context within which business takes place, (2) regulate offshore business practices, and (3) play pivotal roles in new global governance mechanisms.
The study focuses on market reaction to announcements of new unanticipated political events using the event analysis methodology. The findings of the study provide a consistent conclusion regarding the existence of information content hypothesis in the Nepalese stock market. The study reveals that good-news (badnews) political announcements generate positive (negative) abnormal returns in the post-event period. The data present important evidence on the speed of adjustment of stock prices to new political information, i.e., in as many as 2 to 3 days from the announcement date. Thus, this paper finds that the Nepalese stock market is inefficient at a semi-strong level, but there is a strong linkage between political uncertainty and common stock returns.
An efficient financial system can effectively mobilize and allocate resources leading to robust economic growth. Financial liberalization improves the functioning of financial system by increasing the availability of funds and allowing risk diversification and increased investment. The indices of financial liberalization and financial development, generated by the principal component analysis, depict a gradual process of financial liberalization and a continuous financial sector development. The paper finds the presence of bi-directional causal relationship between the liberalization of financial sector and level of financial development in Nepal.
When companies are on the lookout to raise money for their business operations, they use various means for the same. Two of the most popular means to raise money are Initial Public Offer (IPO) and Follow on Public Offer (FPO). During the IPO or FPO, the company offers its shares to the public either at a fixed price or offers a price range, so that the investors can decide on the right price. The method of offering shares by providing a price range is called a book building method. The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. The Issuer specifies the number of securities to be issued and the price band for orders. A Book should remain open for a minimum of 5 days. Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as the cap price. The price at which the shares are allotted is known as the cut-off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public. Both the lead manager and the issuing company fix the price range and the issue size. Next syndicate members are hired to obtain bids from the investors. Normally the issue is kept open for 5 days.
Development of insurance and banking institutions is one of the fundamental constituents that plays an important role in stimulating financial development and thereby the growth of the economy in any country. However the causal effect of these financial institutions can’t be generalized as the development of financial institution is quite different in nature and scale in different countries. This paper attempts to examine the relationship between financial institutions and economic growth in the Indian economy. We find that there exists a long run relationship and insurance institutions do promote the economic growth and vice-versa. It is also found that it is growth in the economy that causes development of banking institutions.