Does the Performance of Banking Sector Affect GDP in Bangladesh?

In this blog post, I tried to study the relationship between banking sector performance and GDP growth in the context of Bangladesh. The banking sector performance is calculated by the year to year growth of banking sector (all the commercial banks) income and profit. Banking sector related data was collected from the “Monthly Economic Trend” May 2016 Issue published by Bangladesh Bank and GDP growth data was collected from the World Data Bank. 

From 1994-2014, GDP of Bangladesh and Income of Banking sector have experienced random but positive growth. But, profit has shown negative growth in 1996, 2002, 2004-07, and 2012-13. In 1996, Sate Owned Commercial Banks (SOCBs) had a drop of profit to Tk. 28.11 crore from Tk. 112.37 crore in 1995. In 2002, all the banks i.e. SOCBs, Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs) had a decline in profit.   From 2004 to 2007, SOCBs had a continuous net loss while FCBs and PCBs (except 2006) had increasing profit. SOCBs also contributed for the negative profit growth in 2012-13. 

Figure 01: Growth of GDP and Banking Sectors’ Income and Profit

Table 01 shows the statistical relationship between GDP growth and Banking Sectors’ Income Growth identified through regression analysis. Using income growth as independent and GDP growth as dependent variable it is found that 24.32% variance of GDP growth can be explained by income growth of banking sector. Significance F value lower than 5% (.05) also validates this model. Coefficient 0.048372 indicates that, other things remaining constant, for 1% growth of income the GDP will grow by 0.048372%. 

Table 01: Regression result between GDP Growth and Banking Sectors’ Income Growth

SUMMARY OUTPUT
Regression Statistics
Multiple R		0.493104
R Square		0.243152
Adjusted R Square		0.203318
Standard Error		0.821636
Observations		21
ANOVA
		df	SS	MS	F	Significance F
Regression		1	4.120797	4.120797	6.104107	0.023125
Residual		19	12.82663	0.675086
Total		20	16.94743
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	4.552721	0.397469	11.45429	5.66E-10	3.72081	5.384632	3.72081	5.384632
Income Growth	0.048372	0.019578	2.470649	0.023125	0.007393	0.08935	0.007393	0.08935

From the GDP growth and Banking Sectors’ Profit Growth regression result shown in table 02, it can be seen that 21.40% of GDP growth can be explained by the profit growth of banking sector. Significance F value of 0.034723 also validates this relationship. Unlike the relationship with income growth, profit growth is showing a negative coefficient of -0.11333 with GDP growth which means that, other things being unchanged, for 1% growth of profit the GDP will decrease by 0.11333%.

Table 02: Regression result between GDP Growth and Banking Sectors’ Profit Growth

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.462599
R Square	0.213998
Adjusted R Square	0.172629
Standard Error	0.837311
Observations	21
ANOVA
	df	SS	MS	F	Significance F
Regression	1	3.626712	3.626712	5.172958	0.034723
Residual	19	13.32072	0.701091
Total	20	16.94743
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	5.317979	0.18914	28.11665	6.04E-17	4.922104	5.713853	4.922104	5.713853
Profit Growth	-0.11333	0.049829	-2.27441	0.034723	-0.21763	-0.00904	-0.21763	-0.00904

Among these statistical relationships, I’m confident about the first one; positive coefficients of income growth with GDP growth.  But, I’m not confident enough about the negative relationship of profit growth with GDP growth. Based on my knowledge, I think there should be a positive relationship as, here, for the banking sector, one of the crucial elements of financial system, profit indicates that this sector is in healthy state and this good performance should positively affect the growth of the country. Because, banking sector works as the intermediary between surplus unit and deficit unit and their profit means that they are successfully doing their job. As a consequence, conceptually, the economic growth should be boosted up because, now, the deficit units with investment opportunities are getting access to funds those were not possible earlier. These deficit units would invest these funds in high return projects, producing products and services, creating employment and all of these should positively affect GDP.  I think, this relationship needs to be tested again by using some control variables. Then, we might be able to draw a confident conclusion about this.