The role of non-bank financial intermediaries (NBFIs) in economic growth (1971-2004) : an empirical case study of Malaysia

Abstract

The importance of financial development (bank and the stock market) in accelerating economic growth has been extensively discussed in both theoretical and empirical studies over the past three decades. The findings of these studies generally suggest that a well-developed financial system tends to have positive impacts on economic growth. However, unlike bank and stock market development, literature examining the role of non-bank financial intermediaries (NBFIs) in influencing economic growth is sparse. This research aims to fill that gap by examining empirically the role of NBFIs in economic growth for the case of Malaysia. The study employs a recently developed autoregressive distributed lag (ARDL) bounds testing approach to cointegration to examine the long-run relationship between NBFIs and economic growth in Malaysia using annual data covering the period 1971-2004. Unlike the other widely used cointegration approach such as Johansen and Juselious (1990), this approach is particularly promising as it is suitable for a small sample size like the present study and also capable of testing the existence of long-run relationship irrespective of whether the underlying variables are of order I(0) or I(1) or mutually cointegrated. The study finds evidence of long run cointegrating relationship between the indicators of NBFIs development and the economic growth in Malaysia. The regression results show that the total assets of NBFIs have positive long run relationship with economic growth and the private credit (other indicator of NBFIs) has positive and significant impact on long run economic growth. Furthermore, the positive and significant coefficient of NBFIs assets supports the concept that NBFIs assets can influence long run growth indirectly through investment channel. Granger causality test shows that in the long run there is bidirectional causality between the indicators of NBFIs and economic growth. In the short run, there is evidence that the NBFIs assets Granger cause economic growth with no reverse effect but in the case of private credit causality is bidirectional. In addition, the study finds evidence that NBFIs assets have significant causal impact on other financial sectors’ development (banks and stock market) and also independent causal influence on economic growth. The study suggests that the development of NBFIs is important for both long run economic growth and for other financial sectors’ (banks and stock market) development. As such, promoting the NBFIs can simultaneously meet the objective of achieving a sound financial system and hence sustainable long run economic growth in Malaysia.