Academic journal article Global Journal of Business Research

The Impact of Credit Union Financial Intermediation on Economic Growth: A Multi-Country Analysis

Academic journal article Global Journal of Business Research

The Impact of Credit Union Financial Intermediation on Economic Growth: A Multi-Country Analysis

Article excerpt

ABSTRACT

The paper investigates the relationship between credit union (CU) financial intermediation and economic growth using seventeen-year data (1995-2011) from 12 CU countries. Using the panel Generalized Method of Moments (GMM) estimation technique, the study finds that there is a statistically significant positive relationship between CU financial intermediation and economic growth. On the strength of this evidence, the paper concludes that CU financial intermediation has a positive impact on economic growth and thus recommends a vigorous promotion of CU financial intermediation in the study countries.

JEL: G2, 01

KEYWORDS: Financial Intermediation, Credit Union, Economic Growth

(ProQuest: ... denotes formula omitted.)

INTRODUCTION

The preponderance of empirical evidence on the finance-growth nexus triangulates around the contention that financial sector provides a fertile ground for the allocation of resources, better monitoring, fewer information asymmetries, and economic growth (Shen and Lee, 2006). Put more succinctly, finance stimulates economic growth. The writings of Schumpeter (1911), Goldsmith (1969), Mckinnon (1973), and Shaw (1973) have contributed significantly to this view. Schumpeter (1911), for example, posits that a well-developed financial system has the potential of catalyzing technological innovation and economic growth through the provision of financial services and resources to those entrepreneurs who have the highest probability of successfully implementing innovative products and processes.

Despite the fact that microfinance is an integral part of the financial systems of most economies, to date, studies on the finance-growth nexus have focused only on stock markets and the banking sector. ADB (2000) defines microfinance as the extension of a broad range of financial services such as loans, deposits, payment services, money transfers, and insurance to poor and low-income households and their microenterprises. It has been hailed as a "silver bullet" approach to development because of its supposed ability to transform the poor and marginalized (Aach, 2008). As part of microfinance institutions, credit unions (CUs) play the role of depository financial institutions, mobilizing savings and making credit available to mostly poor and financially excluded in society. Whether or not this intermediation role of CUs promotes economic growth, to the best knowledge of the authors, is yet to be explored. Consequently, the current study seeks to fill this gap in the literature by empirically addressing one question: Does CU financial intermediation promote economic growth?

The remainder of the paper is sectionalized as follows. Section 2 reviews the relevant literature. Section 3 presents the research methodology employed followed by section 4 which presents the results of the study. Section 5 concludes the paper.

REVIEW OF LITERATURE

It is now established that four causal relationships between financial development and economic growth are conceivable (Apergis et al., 2007). The first hypothesis, called supply-leading response hypothesis, argues that financial development causes economic growth (Schumpeter (1911), the McKinnon (1973) and Shaw (1973). The second hypothesis called demand-following response hypothesis posits that economic growth causes financial development. It argues that the development of the real sector stimulates demand for financial services that are passively met by the introduction of new financial institutions (Odhiambo, 2010). The third hypothesis is mutual impact which argues that there is a bidirectional causal relationship between finance and growth (Demetriades and Hussein, 1996; and Greenwood and Smith, 1997). The fourth hypothesis is no-causal relationship hypothesis which argues that there is no causal relationship between financial development and economic growth (Graff, 1999).

Indubitably, there are some dimensions of the finance-growth nexus that have remained unresolved. …

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