IMPACT OF GOOD GOVERNANCE ON BANKING SECTOR DEVELOPMENT IN ASIAN REGION

Abstract

After the socio-economic revolution and the establishment of the free market institutions, the development and improvement of living standards in post-transition economies are deemed to depend more and more on the so called secondary ‘generating’ reforms, at the core of which is the good governance. Drawing from this approach, this study seeks to address the role and the effect of the good governance in the banking sector development of the Asian countries. The main objective of this study is to evaluate the impact of good governance on banking sector development in Asian countries using a panel of 23 countries from 2008-2015. It utilizes the system Generalized Method of Moments (GMM) dynamic panel model estimator. The researcher creates a new governance indicator (NGVI) that summarizes the existing six governance measurements in the Worldwide Governance Indicators (WGI), using the Principal Components Analysis (PCA) method. Proxies for banking access by commercial bank branches per 100,000 adults (BB), size by deposit money bank assets to GDP (DBGDP), stability by concentration ratio (CR) and efficiency by bank returns on assets (BROA) measure the banking sector development. Results indicate that governance indicators strongly influence to the development of banking stability. Finally, study found that good governance is very important to increase top 3 banks’ market share in the Asian region. Since, the relevant authorities should take the decision to enhance the institutional quality promoting good governance to further improve the banking sector towards the overall growth of the financial sector in the region.