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Factors Influencing Financial Development in Bangladesh: An ARDL Bounds Testing Approach

Corresponding Author : Dr. Md Mahbubul Hakim (hakim-eco@sust.edu)

Authors : Md Imran Hossain Milon

Keywords : Autoregressive Distributed Lag Model, external debt, inflation, interest rate, trade

Abstract :

Financial sector development is essential for achieving sustained economic growth. However, there has been insufficient and unequal financial development in Bangladesh. So, it is crucial to determine the variables that have an impact on the development of the financial sector. Therefore, the focus of this research is to explore the factors that have influenced Bangladesh's financial development from 1976 to 2019 by using the Autoregressive Distributed Lag (ARDL) bounds testing method. The dependent variable is broad money as a percentage of GDP, whereas the independent variables are gross fixed capital formation, the lending interest rate, external debt, inflation, and trade openness. The findings of the ARDL bound test show that there is a stable long-run relationship between the variables. The empirical outcomes show that financial development in Bangladesh is positively and significantly affected by trade openness and gross capital formation in the long run. In contrast, inflation and interest rates both have adverse effects on financial development in the long run, implying that these factors have a detrimental effect on Bangladesh's financial development. However, external debt doesn't influence financial development significantly over the long term. The error correction estimation result shows that the adjustment parameter is negative (0.442), which indicates that short-term departure from the long-term equilibrium is adjusted at a rate of 44.2%. This finding is significant at the 1% level of statistical analysis. In order to boost financial development in Bangladesh, this study recommends that the government of Bangladesh maintain a favorable market structure, maintain a low inflation rate and lower lending interest rates.</p>

Published on September 24th, 2023 in Vol. 34, No. 1, Management & Business Administration