The impact of macroeconomic determinants on the banking sector development in Nepal

Abstract

Abstract
Background: The concept of banking sector development
is multi-dimensional, and it is difficult to establish a single
description for it because it is an interconnected process that
encompasses increases in the number and quality of financial
services.
Objectives: The objective of the study is to examine the
impact of macroeconomic determinants on banking sector
development in Nepal.
Methods: The study applied the vector error correction model
(VECM) approach technique with economic time series data
ranging from 1995 to 2020. The study employed the VECM
model to avoid the spurious regression problem in the
construction of contemporary time series econometrics. The
co-integration analysis is used in the study to determine the
long-run equilibrium relationship between the macroeconomic
variable and the banking sector development of the model.
Banking sector development is measured by the arithmetic
average of the normalized values of banking depth, banking
efficiency, and banking stability.
Result: This study reveals that per capita GDP and remittances
have a positive and significant impact on the banking sector
development. Similarly, government expenditure and stock
market capitalization have positive and statistically significant
roles to explain banking sector development in Nepal. In
addition, it demonstrates that trade openness and inflation
have a marginally negative but insignificant impact on banking
sector development.
Conclusion: There is a long-term equilibrium relationship
between macroeconomic variables and banking sector
development. Macroeconomic policies and institutional quality
play an important role in the banking sector development.
Implications: For policymakers since it clarifies the significance
of sound macroeconomic policies in the development of the
banking industry while taking into account the quality of the
existing institutional infrastructure.