Sources of Banking Sector Development: Case of Pakistan

Banking sector development is one of the key elements benchmarking economic growth. Several empirical studies for several instances have indicated a positive relationship between banking sector development and economic growth. This study intends to examine the sources of banking sector development of Pakistan, using capital formation, interest rate, trade deficit, general price level and remittances as the proposed indicators. There is a lack of studies which investigated the impact of investment and trade deficit on banking sector development. The empirical data for the study is taken from world development indicators for 38 years. For the reliable estimates, ARDL cointegration technique has been used to estimate the long run determinants of banking sector development. Domestic credit to private sector has been used as a proxy for the banking sector development because of its market orientation. The results show that increase in the investment, imports and general price level leads to increase in the provision of domestic credit which leads to banking sector development.