The Impact of Financial Depth and Banking Indicators on Economic Growth in the Gulf Countries: An Analytical Study

Abstract

Recognition of the main drivers of economic growth of a nation is crucial to implement sound policies and regulations that enable economies to improve and progress. One of the key drivers of any strategy for economic growth is the development of the financial sector. The financial sector and its institutions play a significant role in increasing economic growth by supporting creativity and innovation, accumulating private wealth, directing savings into beneficial investments, offering different opportunities for investors, enhancing productivity, and improving the stability of the economy. The present study identifies the role of financial depth and banking indicators as a development of the financial sector in determining economic growth in the Gulf Countries (GC) from 2000 to 2018. For this purpose, the Generalized method of moments (GMM) approach is used. The results indicate that Bank Credits to the private sector are significantly contributing to the economic growth but the bank cost and deposit money banks' assets hurt economic growth in GC. Since the negative impact of credit to government and state enterprises on growth is revealing the phenomenon of crowding out, it is recommended that the governments in GC should promote credit to the private sector instead of borrowing themselves to remove the crowding-out effect.