The impact of the banking sector on economic structure and growth empirical evidence from southeast asia 2022

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY  LÊ PHƯƠNG THÙY THE IMPACT OF THE BANKING SECTOR ON ECONOMIC STRUCTURE AND GROWTH EMPIRICAL EVIDENCE.

- -

LÊ PHƯƠNG THÙY

THE IMPACT OF THE BANKING SECTOR ON

ECONOMIC STRUCTURE AND GROWTH: EMPIRICAL

EVIDENCE FROM SOUTHEAST ASIA

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY, 2022

- -LÊ PHƯƠNG THÙY THE IMPACT OF THE BANKING SECTOR ON

ECONOMIC STRUCTURE AND GROWTH: EMPIRICAL

EVIDENCE FROM SOUTHEAST ASIA

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

SUPERVISOR NGUYỄN DUY LINH, Ph.D

HO CHI MINH CITY, 2022

COMMENT OF THE SUPERVISOR

Ho Chi Minh City,…./…./2022

Supervisor

NGUYỄN DUY LINH

ABSTRACT

The main goal of this research is to investigate how the development of a banking sector (hereinafter "banking sector development") affects the growth, development, and structure of Southeast Asian economies The impact of the banking sector development on the development of the industrial, agricultural, and service sectors At the same time, the study investigates whether economic structure and growth aid in the development of the banking industry The study, which runs from

2008 to 2020, is based on data from Southeast Asian countries The Ordinary Least Squares method and the Dynamic Ordinary Least Squares method were used throughout the study, along with country-fixed effect and year-fixed effect The final results show that the relationship between the development of the banking system and economic development and growth is a two-way relationship in which the impact of agriculture, industry, and service sectors on the banking sector is significant However,

in general, Southeast Asian countries should focus their resources on developing the banking sector and the industrial sector

Keywords: agricultural sector; banking sector; economic structure; economic growth; industrial sector; service sector; Southeast Asia

COMMITMENT

As the author of this graduate thesis, I hereby declare that:

My name is: Lê Phương Thùy

Currently a student in class HQ6-GE05, majoring in Finance and Banking, Banking University of Ho Chi Minh City

The topic of the internship report is: “The impact of the baning sector on economic structure and growth: empirical evidence from Southeast Asia.”

This graduation thesis is done by me, with the help of the instructor, Mr Nguyen Duy Linh The content in this graduation thesis is made based on my research during my study time as well as from summarizing the knowledge I have learned while studying at the school The information, documents and data in this report are completely honest and fully quoted, specific and clear

I take full responsibility for this pledge, respectfully!

Ho Chi Minh City,…./…./2022

Author

Lê Phương Thùy

ACKNOWLEDGEMENTS

First of all, I would like to thank the faculty of Finance, Banking University of

Ho Chi Minh City In particular, I would like to thank Mr Nguyen Duy Linh, the lecturer who directly guided me during the internship and report writing process His enthusiastic guidance and practical suggestions helped me to complete this graduation thesis

I would also like to express my heartfelt thanks to my father and mother, who have given up their time to care for me and who are usually busy from early morning till late at night, so that I have valuable time to concentrate on my thesis and don't have

to worry about anything other than focusing on the thesis

The report cannot avoid certain errors due to time constraints, reasoning level, and personal experience I eagerly await teacher feedback to help me enhance my research

Finally, I would like to wish the teachers of the Faculty of Finance at the Banking University of Ho Chi Minh City good health and success in their teaching work

I wish the leadership, uncles, and brothers and sisters at the Thu Duc branch good health, success in their work, and a dedication to the banking industry

Ho Chi Minh City, …./…./2022

Author

Lê Phương Thùy

Table of Contents

ABSTRACT i

COMMITMENT ii

ACKNOWLEDGEMENTS iii

LIST OF ABBREVIATIONS viii

LIST OF FIGURES ix

LIST OF TABLES x

CHAPTER 1: INTRODUCTION 1

1.1 The importance of research topic 1

1.2 An overview of the research 3

1.3 The research's objective 4

1.3.1 Overall objectives 4

1.3.2 Specific objectives 4

1.4 Research questions 4

1.5 Subject and scope of the study 5

1.6 Research methods 5

1.7 Research contribution 6

1.7.1 Literature gap 6

1.7.2 New contributions 6

1.8 Research structure 7

CONCLUSION CHAPTER 1 8

CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 9

2.1 Theoretical framework 9

2.1.1 Banking sector development and economic growth 9

2.1.2 Banking sector development and economic structure 11

2.2 Literature review 12

2.3 Hypothesis development 16

CONCLUSION CHAPTER 2 22

CHAPTER 3: RESEARCH METHODS 23

3.1 Research process 23

3.2 Data and sample 24

3.3 Empirical methodology 29

CONCLUSION CHAPTER 3 32

CHAPTER 4: RESEARCH RESULTS 33

4.1 Descriptive statistics and univariate analysis 33

4.2 Banking sector in Southeast Asia overview 35

4.3 The effects of banking sector development on industrial sector, agricultural sector and service sector development 37

4.3.1 The effects of banking sector development on industrial sector development 37

4.3.2 The effects of banking sector development on agricultural sector development 40

4.3.3 The effects of banking sector development on service sector

development 41

4.4 The effects of banking sector development on industrial sector, agricultural sector and service sector growth 43

4.4.1 The effects of banking sector development on industrial sector growth……….44

4.4.2 The effects of banking sector development on agricultural sector growth 45

4.4.3 The effects of banking sector development on service sector growth 46 4.5 The effects of economic structure and growth on banking sector development 47

4.5.1 The effects of economic development on banking sector development……… 48

4.5.2 The effects of economic growth on banking sector development 50

CONCLUSION CHAPTER 4 54

CHAPTER 5: CONCLUSION 55

5.1 Conclusion 55

5.2 Limitation of the thesis and future research direction 58

CONCLUSION CHAPTER 5 60

REFERENCES 61

APPENDIX 69

LIST OF ABBREVIATIONS

LIST OF FIGURES

Figure 2.1: The channels of financial development influencing economic 10 Figure 3.1: Research process 23

LIST OF TABLES

Table 3.1: Countries participating in the study 25

Table 3.2: Summary of main variables 28

Table 3.3: Summary of control variables 29

Table 4.1: Descriptive statistics 34

Table 4.2: Correlation coefficient of variables 35

Table 4.3: The effects of banking sector development on industrial sector development 38

Table 4.4: The effects of banking sector development on agricultural sector development 40

Table 4.5: The effects of banking sector development on service sector development 42

Table 4.6: The effects of banking sector development on industrial sector growth 44

Table 4.7: The effects of banking sector development on agricultural sector growth 45

Table 4.8: The effects of banking sector development on service sector growth 46

Table 4.9: The effects of economic development on banking sector development 48 Table 4.10: The effects of economic growth on banking sector development 51

Table 5.1: The impact of the development of the banking sector on the development and growth of the economy 56

Table 5.2: The effects of economic development and growth on banking sector development 57

CHAPTER 1: INTRODUCTION

In the first chapter of the research paper, the author presents the necessity and importance of this research The author clearly states the purpose, scope of the study, the questions to be answered, and summarizes the author's research process Finally, the author presents a brief outline, including the contents of the chapters in the research paper

1.1 The importance of research topic

A commercial bank is a money-management institution whose primary and consistent function is to mobilize deposits for repayment and to make loans for discounting as a form of payment The creation of a bank is regarded as one of the most remarkable inventions in world history, and it is continually developing and perfected to meet the socio-economic needs of each age The bank is an integral part of the economy, especially in the current one, and it has always held a prominent role in the national economy with key activities in money, credit, and payment in which payment is made

Banking is regarded as the essential component of the economy; its operations span all social economic activities; it is a type of intermediary activity involved with the movement of the entire economy Banking is a unique type of business that deals with money Because banks serve as financial mediators between depositors and borrowers, the Bank will be a powerful regulatory tool in the economy as well as in some non-economic domains

Despite the fact that it does not directly generate actual wealth for the economy, the banking industry plays a significant role in fostering economic development through its own operational features The following roles are described in detail:

First, for individuals, organizations, and economic entities to consider: Banks receive money from non-cash payments made at the bank, or the receiving bank preserves precious assets, valuable paperwork,… lowering storage and preservation costs Furthermore, on the basis of clients' deposits, the Bank provides many utilities like payment, money transfer, and other services, lowering money circulation costs while assuring the security, advantage, and benefits for owners Can be mentioned previously

Second, in terms of social reproduction: The Bank usually concentrates on temporarily idle capital mobilization from all businesses and individuals in the economy After that the Bank would use the mobilized capital to invest (securities, research,…) and lend to meet the needs of customers through credit operations All capital-shortage needs of all economic sectors in society are met as soon as possible

As a consequence, businesses, economic organizations, and individuals have the opportunity to expand production, upgrade machinery and equipment, increase economic efficiency, and enhance the reproduction and development processes

Third, in the realm of currency circulation: Banks act as an organizational agency to regulate the circulation of money (limiting the amount of money required in circulation); this role is conveyed through deposit and lending interest rates

Fourth, for the Government: Banks are direct tools of the government for enforcing monetary, credit, and payment rules Through the Bank, the State manages the macroeconomy Simultaneously, the Bank maintains a credit relationship with the Bank by lending to the State Budget in emergency situations or retaining reserves for the State in some gold and foreign currencies

As the economy in general and the banking sector in particular have developed, the Bank has confirmed the foregoing duties through its basic functional areas, namely

currency, credit, and payment Banks, it may be claimed, play a key role in repelling and containing inflation, gradually maintaining currency value and exchange rate stability, and contributing to the betterment of the macroeconomy, investment environment, and manufacturing business

Obviously, the banking industry plays an important role in the economy However,

a number of general studies on the impact of banking activities on the structure and development of the economy have become outdated or still have many shortcomings, not keeping up with reality That is why I chose to research: “Impacts of the banking sector on economic structure and growth: Empirical evidence from Southeast Asia”

1.2 An overview of the research

Southeast Asia has been one of the world's fastest developing regions, with GDP growth per capita exceeding the global average for many years (according to the World Bank) Bank penetration data, on the other hand, reflect something more remarkable: according to a 2011 World Bank report, approximately 41.14 percent of Southeast Asians have a bank account By 2017, this figure had risen to 52.64 percent Singapore has the highest value at 97.81 percent, while Cambodia has the lowest value at 17.8 percent From there, it is clear that the banking industry in Southeast Asia is rapidly expanding

Since the 18th century, the importance of banks in the economy has been recognized; many study papers on the role of banks in the economy have been published (J Schumpeter & Backhaus, 1911, 1934) research on the relationship between financial development and economic expansion has received a lot of attention from other economic researchers, in which, the development of the banking sector can

be described by the ability of the banking sector to providing broad financial services and products that satisfy the rabid expansions of economic activities

Many other studies (King & Levine (1993b, 1993a); Thornton (1996); De Gregorio & Guidotti (1995); Berthelemy & Varoudakis (1996)) have documented the positive effect of financial development on economic growth using a variety of econometric techniques, such as cross-sectional, time series, panel data, firm level, industry level From this we can see that this is an issue worthy of attention

1.3 The research's objective

1.3.1 Overall objectives

Studying the relationship between banking sector development and the structure and development of the economy across three sectors: agriculture, industry, and service

1.3.2 Specific objectives

Specific objectives to achieve the main goal:

- Determining the level of impact of the banking sector development on the development of economic sectors

- Determining the level of impact of the banking sector development on the growth of economic sectors

- Determining the level of impact of the growth of industry, agriculture, and service sector on banking sector development

1.4 Research questions

To fulfill the above goal, this thesis’s significant mission is to answer these following questions:

- Question 1: Does the development of the banking sector have a positive or

negative effect on the development of the agricultural, industrial and service sectors?

- Question 2: Does the development of the banking sector have a positive or

negative effect on the growth of the agricultural, industrial and service sectors?

- Question 3: Does the development of agriculture, industry and service sectors

have a positive or negative influence on the development of the banking sector?

1.5 Subject and scope of the study

- Scope of content: This thesis mainly focuses on studying the impact of the

banking sector on economic structure and growth

- Time range: from 2008-2020

- Spatial range: in Southeast Asia (Consists of six countries: Brunei, Indonesia,

Malaysia, Singapore, Thailand and Vietnam)

- Methods of analysis and evaluation: Analyze problems related to details goals to find out the factors affecting the development of the banking sector based on the industrial, agricultural and service sectors in six SEA countries from 2008 to

2020 The data of the thesis is panel data, author predominantly uses ordinary least squares Because these sector development may be persistent, author

constructs a set of baseline panel dynamic OLS regressions

- In-depth research methods: The author compares the research results with reality and makes an assessment Based on the previous dissertations and the actual situation to draw experience as a premise for future studies

1.7 Research contribution

1.7.1 Literature gap

Understanding the influence of the banking sector on economic sector structure and growth is important for countries However, previous studies on this relationship are outdated because the influence of the banking sector on the economy changes from time to time and from region to region, the most recent study on this topic that the author found is a study of Tongurai and Vithessonthi (2018), they used data from 1960–2016, in which the earliest data updated from Southeast Asia was in 1975, according to The World Bank In this research paper, the author has updated the latest data for the study as well as focused on the Southeast Asia region, a region that has never been noticed before The author believes that the geographical location, history, and economy of Southeast Asian countries have created a distinctive feature for this region

1.7.2 New contributions

– Scientific significance: The thesis affirms the link between the development of

the banking sector with the development of the economy and its structure in the economies of Southeast Asian countries from 2008 to 2020

– Practical significance: The relevance of the formal banking sector, as well as

the development of financial intermediaries, for the expansion of the financial sector and the economy is emphasized in the thesis The study emphasizes the importance of regulators and monetary policymakers recognizing how sensitive the banking system is to economic development and structure From there, both

the author and the administration will have a stronger foundation to offer advice and pursue economic reform proposals Managers can also design solutions to make their long-term strategy more competitive and productive

Chapter 2 Overview of the research situation

In this chapter, the thesis presents an overview of the literature, develops hypotheses related to this topic and presents research models

Chapter 3 Research methods

The introduction of the dataset and the models used to explore the impact of the banking sector on economic structure and growth in Southeast Asia is the focus of this chapter

Chapter 4 Research results

The model analysis is based on data collected from six Southeast Asian countries from 2008 to 2020, and the thesis uses the statistical software Stata to test and estimate the regression coefficients of country variables in the model The author next compares the collected data to past studies in order to interpret the results logically This outcome gives evidence to help answer the thesis's research questions

Chapter 5 Conclusions

This chapter details the key experimental outcomes related to the thesis's study aims At the same time, this chapter acknowledges significant limits in the thesis that have yet to be overcome This is also the thesis's final chapter

CONCLUSION CHAPTER 1

In chapter 1, the author briefly introduced the study "Impacts of the banking sector on economic structure and growth: Empirical evidence from Southeast Asia", including the reasons for choosing the research, previous studies on the same topic, methods, and scope of research The author also presented the process of carrying out his research and briefly outlined the research content of the following chapters for the reader to easily understand

CHAPTER 2: THEORETICAL FRAMEWORK AND

LITERATURE REVIEW

In this chapter, the author presents the basic theories and definitions of banking sector development and economic growth (through the agricultural, industrial, and service sectors) in the Southeast Asian countries At the same time, the author also provides the theoretical framework, theoretical basis, and empirical evidence from previous studies on this issue in order to emphasize the urgency of the topic and create

a foundation for the development of a research model and evaluation of research results

in the following chapters Finally, the author builds the research hypothesis and completes the research model

2.1 Theoretical framework

2.1.1 Banking sector development and economic growth

The banking industry contributes significantly to the overall economic development of all countries around the world Due to the inadequacy and restrictions

of capital markets, as well as the inability to offer appropriate funding to investors, banks are the primary source of credit in developing countries (Saci et al., 2009) Banks are very important institutions that serve as the financial sector's backbone, playing a major role in the development of various economic sectors by managing and controlling cash flows, utilizing opportunities for investment, and ensuring that money transfer channels to projects are efficient and profitable The relationship between the banking sector and economic growth is a contentious issue According to Revell & Goldsmith (1970), the size of the banking sector is linked to the supply and quality of financial intermediation, and his study had revealed a positive correlation between the banking sector and economic growth

As previously stated, economists paid little attention to the possible link

between the financial sector and the real sector until the early twentieth century, when the famous German economist (J A Schumpeter, 1997; J Schumpeter & Backhaus, 1911) discovered that financial sectors, particularly banks, is extremely important in

the growth of the real economy (Modern growth theory) He contended that banks

efficiently mobilize and allocate capital, provide necessary credit to entrepreneurs to finance physical capital investments, and adopt new production techniques, by that fostering technological innovation and setting the stage for creative destruction, all of which contribute to economic growth (D Allen (2000); King & Levine (1993b)) This viewpoint suggests that financial development leads to economic progress; hence, Schumpeter can be considered a pioneer in developing the concept regarding the relationship between finance and growth Demetriades & Hussein (1996) found that the connection between financial development and growth differs between nations in their study They also found a feedback link in almost half of the nations studied, but in other countries, the relationship flows from growth to finance, implying that it is far from universal that financial development can contribute to economic progress

Figure 2.1: The channels of financial development influencing economic

Shaw (1973) argued persuasively for the supply-led hypothesis (1973) They

Financial sector

Allocate resources

Mobilise savings

Exert corporate control Ease risk management

Ease trading

Economic Growth

Capital accumulation

Technological innovation

contend that if a banking system is restrained, notably by cap rates, lending policies, and excessive reserve requirements, economic growth will suffer This phenomenon, according to the duo, leads to low levels of savings, credit allocation, and investment

As a result, they advocate financial liberalization, which would allow real interest rates

to rise, increasing financial savings The essence of the issue is that an increase in saving compared to real economic activity increases financial intermediation, which increases effective investment and economic growth (Ayadi et al., 2008)

2.1.2 Banking sector development and economic structure

The banking sector plays a major part in the economic development of any country Due to capital market weakness and limitations, as well as the inability to provide enough sources of funding to investors, banks are the primary source of credit

in developing countries (Saci et al., 2009) The development of the banking sector and economic progress in Southeast Asian countries is accompanied by a change in the economic structure of these countries Agriculture's percentage of GDP in these nations has been declining over the last 10 years (most notably in Indonesia, Malaysia, and Thailand), despite rising agricultural output With increasing economies, these countries' economies have been oriented toward industrial and service expansion, resulting in a fall in agriculture's share of gross domestic product

According to Robinson (1979), financial intermediaries and markets appear at the request of industry As a result of the economic structure, intermediaries and marketplaces arise The argument that the types of activities in which enterprises engage affect the manner of funding and thus the financial structure of the country has yet to be addressed directly in the literature To give proof to the claim that the structure and changes in the current economy dictate the direction in which a country's financial system develops, they first differentiate between different financial systems However, despite the recent focus on a more systematic classification of the financial

system, the literature only provides fairly broad definitions and classification metrics

(Modern growth theory)

According to Banking vs Market-Based Theory, financial intermediaries play a

crucial role in a bank-based financial system by mobilizing funds, providing credit, and facilitating hedging, aggregation, and risk valuation Capital markets are the primary financial conduit in a market-based financial system (F Allen & Gale, 2000)

In contrast, in 2020, Allen discovered that the structure of the current economy can influence the structure of the financial system The bond between them is maintained even during systemic crises Changes in the economic structure result in changes in the financial system's structure, with the stock market becoming more significant than the banking sector As a result, the findings of event studies indicate a causal relationship between economic and financial structure

2.2 Literature review

A significantly of study suggests that banking sector development plays a significant role in economic development, according to the (The World Bank, 2020) It fosters economic growth through capital accumulation and technical progress by increasing the savings rate, mobilizing and pooling funds, producing investment information, facilitating and encouraging foreign capital inflows, and optimizing capital allocation Over extended periods of time, countries with more developed financial systems tend to grow quicker, and a vast body of data suggests that this effect

is causal: Financial development is not merely a byproduct of economic expansion; it also contributes to it

For many decades, scientists and policymakers have been interested in the relationship between financial development and economic growth, this relationship has been extensively researched in literature Earlier research (King & Levine (1993a);

Rajan & Zingales (1996)) has shown that financial development has a favorable effect

on economic growth They indicate that the preset component of financial development accurately predicts growth over the next 10 to 30 years While their work suggests that the observed association is not spurious, it does not put any suspicions regarding causality to rest The skeptic could still make several arguments According to Manganelli & Popov (2015), the effect of finance on production variability relies on whether monetary or real shocks are present, and whether the real shocks are caused by changes in credit demand or credit supply They discover that sophisticated financial markets minimize long-term volatility in 28 (Organization for Economic Cooperation and Development) OECD nations from 1970 to 2007 In addition, due to data constraints, their sample is limited to industrialized countries Larrain (2006) discovered empirical evidence that financial development reduces production volatility

in industrial businesses with strong external dependency and liquidity requirements Beck et al (2000), on the other hand, find no link between financial development and long-term volatility

In their study of 101 industrialized and developing nations from 1970 to 2010, Ductor & Grechyna (2015) found that financial and real sectors grew at different rates from 1970 to 2010 The relationship between financial development and economic growth is influenced by the growth of the economy's real sector Their findings imply that the positive influence of finance on growth is greatest when the financial and real sectors increase in tandem When credit expansion is not supported by an increase in the money demand of the economy's productive sectors, the likelihood of capital being allocated to malevolent investments increases, potentially leading to a major economic slowdown or possibly a financial crisis These findings could be used to supplement macroprudential policy rules

The banking system is a critical avenue via which financial development

influences growth The function of the banking industry is especially crucial for emerging markets and small economies with underdeveloped bond and equity markets Many firms rely heavily on bank loans as their major (or sole) source of external capital (Chinn & Ito (2005); Frederickson & Cline (2010)) Banking sector development is critical for economic growth because of the vital function of banks in mobilizing money to profitable investment opportunities and exercising effective corporate governance According to Liu et al (2014), industrial sectors that rely on external capital grow quicker in nations with higher levels of financial development Using data from 48 economies, an empirical study has revealed that increased levels of banking competition and stability contribute to increased industrial growth.According

to their study, adding one percentage point to financial depth by way of GDP increases the actual value added in a given industry by between 0.045 percent and 0.059 percent for a given level of external dependency

The development of a banking sector will benefit economic growth if it reduces business financial restrictions and boosts the efficiency of money allocation to organizations with valuable investment opportunities Empirical research suggests that increasing levels of financial development alleviate enterprises' financial limitations (Islam & Mozumdar (2007); Love (2003)) Companies must be able to fund their investments at an adequate cost of capital when there is a high level of financial development Banking sector development is supposed to increase economic activity and growth by improving access to financing and allocating funds more efficiently to higher productive uses Hassan et al (2011) studied the link between financial

finance development and economic progress in developing countries Furthermore, a short-term multivariate analysis yielded conflicting results: most locations had a two-way causation relationship between finance and growth, while the two worst regions

had a one-way causality relationship from growth to finance Furthermore, real-world variables like trade and government spending play an essential part in explaining economic growth For developing countries to achieve consistent economic growth, a well-functioning financial system appeared to be a necessary but not sufficient condition

Previous research has demonstrated that the development of the banking sector has a favorable influence on output growth Beck et al (2000), for example, show that private credits (i.e., credit extended to the private sector through financial intermediaries) are strictly related to economic development, owing to the consequences of bank performance of bank performance to non-financial firms Gimet

& Lagoarde-Segot (2012) discover, using panel data from 138 countries from 2002 to

2009, that inter-bank competition, adequate macroprudential safety, the growth of capital markets, adequate civil rights, and entrepreneurship support can fortify the connections between banks and economic progress, and are crucial characteristics for enhancing banks' ability to deliver larger loan flows to the private sector and improve financial inclusion for the needy

Tongurai and Vithessonthi presented a study paper on the influence of banking sector development on the economy in early 2018, focusing on the industrial and agriculture sectors They believe that the development of the banking sector has varied effects on the development of the industrial and agricultural sectors If a more advanced banking system is required for industrial sector development, emerging countries ought to prioritize modernization of their banking systems If, on the other hand, the development of the banking sector follows the development of the industrial sector, then a country must first assist in the development of the industrial sector Using data from all across the world, their findings suggest that the development of the banking sector has a negative impact on the development of the agricultural sector

However, this detrimental effect is only evident in nations with advanced banking sectors They discover that the development of the banking sector has no effect on the increase of the industrial sector Furthermore, the development of the banking sector has a negative impact on industrial sector growth but has no impact on agricultural sector growth

Among the large number of studies, earlier disaggregate studies on the link between financial development and economic growth are uncommon in the field of financial development As a result, the author anticipates that the development of the banking sector will have varied effects on economic structure and sectoral growth The author chose the industry, agriculture, and service sectors to represent the development and growth of the economy because these are the three main sectors of the economy in any country Changes in these regions not only reflect changes in the banking system but also changes in national policy In addition, there have been many empirical studies

on the relationship between these regions and the development of the banking sector, which forms a solid foundation for the study More particular, author anticipate that the development of the banking sector will promote the development of the industrial sector, the agricultural sector, and the service sector in different ways If the development of the banking sector has various effects on the industrial, agricultural, and service sectors, we will see changes in the relative importance of the above sectors

in the economy as the banking sector grows

2.3 Hypothesis development

Our findings are an extension of the preceding discussion and the findings of previous studies (Beck et al (2000); Ductor & Grechyna (2015); Kim et al (2016); Mirzaei & Moore (2016); Pang & Wu (2009)),which argue that financial resources are one factor contributing to economic growth at the industry level The allocation of capital to investment activities with the highest returns is an important role of the

financial sector in economic development (Greenwood & Smith (1997); King & Levine (1993a)) Because a more modern financial system has a higher degree of financial allocation efficiency (Greenwood et al., 2010), funds will be allocated to companies with higher growth potential and less to industries with lower development prospects That is, an industry with more investment prospects is more likely to grow faster and hence gain more from financial development When financial development advances further, an industry with fewer investment options is more likely to have problems collecting extra funds for investment

Previously, the significance of the banking sector in encouraging industrialization and economic development was investigated (Da Rin & Hellmann (2002); King & Levine (1993a); Ross Levine (1997); Rajan & Zingales (1996); Rioja & Valev (2003)) Because economic structures tend to become more industrialized as economies progress, the endowment of banking development to industrial sector development and growth is predicted to differ at different stages of economic evolution As a result, author anticipated that the development of the banking sector will have diverse effects

on economic structure (e.g., the relative significance of the industrial, agricultural, and service sectors) and sectoral growth More precisely, author anticipated that the development of the banking sector will boost the development of the industrial, agricultural, and service sectors in varied ways If the development of the banking sector has various effects on the industrial, agricultural, and service sectors, we will see changes in the relative significance of these sectors in the economy as the banking sector grows

A country with a higher labor and/or natural resource abundance is more likely to build an agricultural industry first It will then develop industries and services If a country takes these easy measures in the right order of development, it will see a shift

in the distribution of financial resources between the three sectors as the banking sector develops further

Consider a country that is still in its early stages of economic development and has a limited banking sector and subpar capital markets The agricultural, industrial, and service sectors are likely to profit from the expansion of the banking industry in the early phases of economic development, when almost all sectors are underdeveloped There are two possible outcomes from this: The rise of the banking sector may have a detrimental impact on the service sector in the early stages of economic development because most countries tend to focus on economic development, develop the industrial sector, and thus are more likely to allocate large amounts of resources disproportionately; or, for some countries, the development of the banking sector will making the service sector develop beyond the industrial sector due to the lack of technology, low technical level, not being able to compete with developed countries, etc., causing the economic structure to lean towards service development to gain more profit To finance and support new economic investments, the banking sector must inevitably expand The industrial and service sectors are developing and modernizing

at the same time that the banking system is becoming more developed The banking sector is developing at a moderate pace Depending on each country's current condition, economic development during this period is likely to center on industry or services Based on the research by Park and Shin (2013), the industrial sector is not the main sector of GDP in SEA countries, as well as SEA is a later developed regions later than other regions in the world (based on historical progress), so the author believes that the second scenario will happen As a result, the author offers the hypothesis listed below

Hypothesis 1: The impact of banking sector development on industrial sector development should be negative for SEA countries

It is considered that after a certain level is reached, the agricultural industry is less likely to develop further, and the manufacturing sector has better investment potential than the agricultural sector According to Tongurai & Vithessonthi (2018), banking sector development has a negative effect on agricultural sector development Based on the above research results, the author hypothesized that the development of the banking sector is then expected to have a detrimental impact on the development of the agricultural sector in Southeast Asian countries from 2008 to recent years in general, as this is where the agricultural sector is located

Hypothesis 2: The impact of banking sector development on agricultural sector development should be negative for SEA countries

Because the second scenario is plausible, the author also thinks that the development of the banking sector has a favorable impact on the development of the service sector This is perfectly compatible with the findings of Park and Shin (2013), who calculated the contributions of agriculture, industry, and services to GDP growth and discovered that the service sector contributed the most in general When combined with considerable real output growth in the service sector comparable to that of the industrial sector, this shows that services are already a major source of growth in Asia Another encouraging aspect is that the proportion of service sector output exported in most Asian countries tends to rise over time

Hypothesis 3: The impact of banking sector development on services sector development should be positive for SEA countries

In conclusion, the author expects the influence of banking sector development on industrial sector development in Southeast Asian countries to be negative The author anticipates a detrimental influence of banking sector development on agricultural

sector development in these nations Last but not least, the author predicts a positive impact of banking sector development on service sector development

We are now focusing on the prospect that economic activity may fuel the development of the financial sector Bank lending activities are generally vulnerable to economic cycles Credit booms, for example, are associated with periods of economic development and are then reversed during periods of economic collapse (Mendoza & Terrones, 2008) For example, during times of economic expansion, the financial sector, particularly the banking sector, ministers to offer a significant amount of credit

to the private sector Recessionary forces from an economic downturn that raises the quantity of bank NPLs are likely to drive banks to limit credit extensions Banks are being forced to reduce their credit extensions even further due to capital adequacy and regulatory oversight

Building on this logic, the author contends that as the real sector develops and expands (i.e., the industrial sector, agricultural sector, and service sector), it can influence the development of the banking sector Previous research has shown that there is a bidirectional relationship between banking development and economic growth A summary of empirical works on this subject is presented, for example, by Nyasha & Odhiambo (2014) The author argues, as has been shown in previous research, that economic structure, and development of the real sector, are factors influencing financial institutions' development These hypotheses are as follows:

Hypothesis 4: The expansion and growth of the industrial sector have a favorable impact on the development of the banking sector in SEA countries

Hypothesis 5: The development and growth of the agriculture sector have a beneficial impact on the development of the banking sector in SEA countries

Hypothesis 6: The expansion and growth of the services sector have a beneficial impact on the development of the banking sector in SEA countries

CONCLUSION CHAPTER 2

In chapter 2, the author gave an overview of the development of the banking sector in Southeast Asian countries and provided preliminary information on the relationship between the development of the banking sector and the development and growth of economic sectors in Southeast Asia Also, in this chapter, the author mentioned many studies on the same topic as the previous authors and different results were obtained from each study because of the difference in time and research scope From these theories, the author has built six hypotheses for the study, as well as a general research model

CHAPTER 3: RESEARCH METHODS

In this chapter, the author presents the process and methods of data collection and processing to conduct the research The variables used in the study have been thoroughly summarized by the author From there, the author proceeds to set up an empirical methodology

3.1 Research process

Figure 3.1: Research process

More specifically, the steps are presented below:

Step 1: The author chose a research topic: Impacts of the banking sector on

economic structure and growth: Empirical evidence from Southeast Asia

Step 2: The author considers theoretical frameworks and theoretical foundations

related to the relationship between the banking sector and the economy

Step 3: The author synthesizes documents, policies, journals, doctoral theses

related to the topic both at home and abroad The data is collected from reputable and reliable sources such as the World Bank, the International Monetary Fund, Data Line, and their related reports

Step 4: With the support of Hausman test, the author chose the most suitable

model: OLS and DOLS with fixed-effect and solved the autocorrelation problem After that, the author discusses the results found

Step 5: The author continues to complete the rest of the research

3.2 Data and sample

The sample includes six Southeast Asian countries: Brunei, Indonesia, Malaysia, Singapore, Thailand, and Vietnam I used annual macroeconomic data from Datastream, the World Bank's World Databank, the International Monetary Fund, and their annual reports for the period 2008–2020 (see Table 3.1) Author measure industrial sector, services sector, and agricultural sector by the value added by these sector as a percentage of GDP

The author estimates the development of the banking sector using three

parameters First, BANK1 represents banks' share of domestic lending to the private

sector as a percentage of GDP Only credit extended to the private sector by depository financial institutions is included in this variable (i.e., banks) This ratio reflects the significance of the financial sector, particularly deposit money institutions, in the financing of the economy (Robert V Levine, 2003); it also evaluates the activity of financial intermediaries in one of their primary functions, which is to channel savings

to investors The metric is regarded as a good predictor of banking sector development (e.g: Berkes et al (2012); Ductor & Grechyna (2015))

Second, BANK2 is the financial sector's share of domestic credit as a percentage

of GDP, which represents the depth and scale of the banking sector This metric has been widely utilized in the literature (e.g: Ductor & Grechyna (2015); Eichengreen et

al (2011)) and is regarded as a good predictor of financial sector expansion when compared to other options.

Table 3.1: Countries participating in the study

Singapore Developed/ Advanced High income Service

Thailand Newly industrialized

The third indicator is BANK3, which shows how many commercial bank branches

there are per 100,000 adults Branch offices of commercial banks serve as retail locations for their customers, providing financial services, and are physically separated from their main offices, but are not organized as legally independent corporations, which is used to assess the banking sector's progress in terms of financial access (Sahay et al., 2015) Customers should be served by more commercial bank branches

in a country with a more advanced banking system More specifically, increased access

to and use of financial services is connected with decreased financing barriers for

individuals and enterprises, which can broaden opportunities for all.A stable financial system that stimulates efficient savings and investment is also required for a functioning democracy and market economy Many factors influence access to financial services, including availability, cost, and service quality Credit market development and growth are dependent on fast, reliable, and accurate data on users' credit experiences

The author estimates the development and growth of the agricultural, industrial,

and service sectors using the following parameters: AGRDEV, INDDEV, and SERDEV

represent the development of the agricultural, industrial, and service sectors respectively, as measured by the industry's value added as a percentage of GDP

AGRSIZE, INDSIZE, SERSIZE represent the growth of the agricultural, industrial, and

service sectors respectively as measured by the first difference in the natural logarithm

of the real value added of the sector in USD (which is equivalent to percent growth)

Control variables include:

1) GDP per capita is a measure of a country's total economic output divided by the

number of people and adjusted for inflation (GDP) It is used to compare living

standards between countries and throughout time

2) GDP growth (∆GDP), as determined by the first difference in the natural

logarithm of real GDP per capita

3) The net foreign asset (FAGDP) (Vermeulen & de Haan, 2014) is the value after

subtracting the value of foreign assets owned by a country from domestic assets

exchange rates

4) Government spending (GOVGDP), as measured by general government final

consumption expenditures as a proportion of GDP Government spending is employed as a measure of macroeconomic stability, while trade openness is

utilized to indicate the economy's accessibility in empirical studies (e.g Atif, R M., Jadoon, A., Zaman, K., Ismail, A., & Seemab (2010); D Allen (2000)) Government spending can slow economic growth by crowding out private investment and causing inflationary pressures due to the necessity for monetary financing of fiscal deficits (D Allen, 2000)

5) Annual percentage inflation (INF) as calculated by the GDP deflator Inflation

may have an impact on economic growth through the banking sector by lowering the overall amount of credit accessible to businesses Inflationary pressures can reduce the real rate of return on assets Lower real interest rates discourage saving while encouraging borrowing New borrowers entering the market at this moment are more likely to be of lower quality and to default on their loans Banks may curtail lending in response to the combined effects of reduced real returns on loans and an influx of riskier borrowers (Chowdhury, 2002)

6) The interest rate (INT), as defined by the real interest rate percentage, is the rate

at which borrowers pay interest on money borrowed from a lender Interest rate movements have a direct impact on the daily lives of all economic entities (Dotsey, 1998)

7) Investment (INV), calculated as a percentage of GDP by gross fixed capital

creation In terms of macroeconomic policy, gross fixed capital creation, which accounts for the majority of domestic investment, is regarded as an important process that has the potential to boost economic growth (Xu, 2000)

8) Trade openness (TRADE), calculated as total trade as a percentage of GDP,

which is computed as a proportion of GDP export share to calculate the role and influence of trade on GDP This is an index that reflects an economy's appropriate level of openness and serves as an important basis for FDI investment decisions (Yanikkaya (2003); Silajdzic & Mehic (2018))