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THE DETERMINANTS OF FINANCIAL DEVELOPMENT IN CASE OF
CENTRAL ASIAN COUNTRIES
Otabaev Yodgor
Senior Lecturer at Turin Polytechnical University in Tashkent
https://doi.org/10.5281/zenodo.15486566
Introduction
The growth of the financial sector is essential to economic development and
is widely regarded as a sign of a nation's prosperity (Svirydzenka, 2016). But
differences in how each nation's financial sector has developed can cause a gap
between advanced and developing countries. The gap in progress between
emerging and developed nations is best illustrated by the Asian region,
especially when it comes to the financial industry (Svirydzenka, 2016; Shen and
Lin, 2007). Furthermore, the post-global financial crisis era suggests that Asian
banking efficiency and liquidity must improve. This is because Asian banks
outperform banks in other regions of the world, as noted by Vinayak et al.
(2016), and as a result, they have a major influence on the viability and
efficiency of the global banking system. Unexpectedly, Central Asian nations
have experienced remarkable economic expansion since the year 2000. The
combined gross domestic product (GDP) of Kazakhstan, Kyrgyzstan, Mongolia,
Tajikistan, Turkmenistan, and Uzbekistan increased by 7% annually on average
between 2000 and 2016 (OECD, 2018). The financial system has been
sufficiently developed to support economic development at a different pace than
the comparatively advanced economies of central and eastern Europe (Djalilov
& Piesse, 2011). The production disparity appears to have closed between
Central Asian nations and South Korea and Japan (Yormirzoev, 2021).
Nonetheless, there is a tendency for the financial stability of Central Asian
nations to deteriorate. For instance, the public's trust in Tajikistan's financial
system's soundness was severely damaged by the country's 2015 financial
collapse (OECD, 2018). In the meantime, financial stability has declined recently
in other countries like Kyrgyz Republic, Kazakhstan, and Uzbekistan (World
Bank, 2017). Meanwhile, since 2005, Central Asia's average bank penetration
has declined, with Tajikistan and the Kyrgyz Republic making major
contributions (World Bank, 2017). In fact, Fu et al. (2014) show that economic
stability is enhanced by greater bank market dominance in Asia. On the bank
concentration - stability hypothesis, however, opinions differ. Furthermore, in
terms of economic independence, Central Asian nations are still categorized as
"largely unfree" or "repressed" (The Heritage Foundation, 2021). The financial
industry is dominated by banking and has limited growth with little in the way
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of regulatory frameworks. Credit prices are high as a result. In fact, opinions on a
wide range of investigations examining the relationships among financial
liberalization, capital supervision, and bank stability continue to differ. There
are no doubtful theories regarding how financial liberalization affects bank
stability. Financial liberalization may result in instability, according to Allen and
Gale (2000), Demirgüc-Kunt and Detragiache (1999), and Cubillasa and
González (2014). On the contrary, financial liberalization and bank stability have
been found to positively correlate, according to Kaminsky and Schmukler (2008)
and Santoso et al. (2020). In addition to financial liberalization, there are a
number of other essential determinants which directly and indirectly influence
on financial development in case of Central Asia countries. This paper is
devoting to examine the impact of selected determinants of financial
development and also contribute to enlargement of literature regarding to this
study. In the following paragraphs, previously conducted papers are going to be
reviewed in order to mention and employ as a role model in response to analyze
the influence factor of determinants in terms of giving an inference. Since this
study’s empirical analysis is based on panel data analysis, information about
econometric model is going to be delivered in methodology and in results
paragraphs in the following sections of this study.
Literature review
Five groups were created by the researchers to contain all endogenous and
exogenous factors influencing financial progress. These include the
government's intervention, institutions, legal customs, openness policies, and
political economy variables (Voghouei et al., 2011). The accomplishments of a
nation's financial industry can be ascertained by contrasting the levels of prices
and quantities, especially the interest rate spread and stock flow. Numerous
scholars employed various financial development parameters. Credit to private
as a percentage of GDP was utilised, for example, by Scartascini (2012), Huang
(2005), and Arcand et al. (2015). Conversely, liquid obligation (M2) as a
proportion of GDP was employed by King and Levine (1993), Demetriades and
Leuintel (1996), and Saci and Holden (2008).
The empirical research conducted by Mbulawa (2015) reveals compelling
proof that trade openness, institutional characteristics, and economic expansion
all contribute to the explanation of financial development, or the percentage of
GDP attributed to credit to the private sector. Hofmann (2001) examined the
factors influencing credit to the private non-bank sector using data from 16
industrialised nations. The researcher discovered that real interest rates had a
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detrimental impact on financial progress. Akinlo and Oni (2015) assert that the
reserve ratio and prime lending rate contribute to a decline in credit in the
private sector. Although real lending by banks to private companies tends to
decline, inflation increases private credit to the private sector. Badeb and Lean
(2017) investigated the primary factors influencing financial development in the
Republic of Yemen employing the principal component methodology. They
discovered that trade openness and economic expansion had a favourable effect
on the rate of financial development. Being dependent on natural resources has
detrimental effects.
Takyi and Obeng (2013) also used an auto-regressive distributed lag model
to identify the factors that influenced Ghana's financial progress. According to
the model's estimation purposes, trade openness and per capita income both
significantly and positively impacted a nation's ability to advance financially.
Reserve necessities for financial institutions have a detrimental statistically
significant affect in both the short and long term, but inflation and interest rates
have a positive statistically significant impact. On the contrary, spending by
governments has little impact. Benya (2010) found a strong positive correlation
between trade openness and financial development. Huang (2005) asserts that
financial development benefits from political liberalization, particularly in the
near term. Assefa (2014) used a supply-side technique to assess the short- and
long-term effects of macroeconomic parameters, bank-specific factors, and
monetary regulation on bank loans to the private sector in Ethiopia. The rule,
the author found, has no long-term or short-term impact on commercial lending
loans to the business community.
Applying yearly time series data from 1995 to 2014, Bist and Read (2018a)
used panel co-integration analysis to examine the long-term connection between
financial growth and economic expansion in 16 nations with low incomes. The
outcome of the dynamic OLS estimation demonstrates that financial stability
significantly and favourably influences the growth of the economy. Ellahi (Ellahi
et al., 2021) investigated the institutional elements influencing the South Asian
Association of Regional Cooperation (SAARC) region's financial sector. Using the
generalized method of moment, the author discovered that financial strength is
statistically positively and significantly impacted by trade openness,
governmental characteristics, legal origin, and real gross domestic product.
However, inflation has a very detrimental impact. Numerous elements that
either beneficial or detrimentally impact the Report Phrase finance-growth
relationship were covered in recent studies. The influence of inflation on the
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connection between finance and economic growth in the West African region
was investigated by Ehigiamusoe et al. (2019). They discovered an adverse
relationship between financial development and the price index. Determining
the inflation threshold, which was 5.6% above and would be detrimental to the
association, is a novel finding. Important research revealed that it is preferable
to enhance financial development while lowering the rate of inflation rather
than raising both. An identical study was conducted in 2019 by Ehigiamusoe et
al., who examined the importance of macroeconomic stability in determining
financial development. The analysis of the West African region revealed that
macroeconomic stability is crucial, especially for enlargement of financial
sphere.
Objective of Study
The primary objective of this study is to empirically examine the key
determinants of financial development in the context of Central Asian countries
using panel data analysis. By exploring both macroeconomic and institutional
variables, the study aims to identify the underlying factors that significantly
influence financial development across the region. Particularly, it has major
concerns on:
Analyze the impact of economic growth (GDP per capita), trade openness,
inflation, and other factors on financial development.
Evaluate the role of institutional quality indicators such as governance,
regulatory efficiency, and rule of law in shaping financial sector development.
Employ an appropriate econometric technique, such as Fixed effects,
Random effects, or Generalized Method of Moments (GMM), to address potential
endogeneity and heterogeneity issues in the panel dataset.
Provide policy recommendations for Central Asian governments to
enhance financial sector performance and support sustainable economic growth.
Central Asian countries are argued as so close with each other in terms of
language, tradition and in economic perspectives as well. However, since those
countries are facing new developing era, the role of financial development is
considered as significant and below the role of some factors in evaluating the
development of finance sphere is going to be explained by both theoretical and
empirical methods.
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2.
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