Causality between bank's major activities and economic growth: evidences from Pakistan

Background: Banking is an important sector of Pakistan’s economy. It is general consideration that bank’s major activities saving and lending have positive impact on economic growth. So the aim of this study is to investigate this consideration and also investigate that either growth led deposits and credits, or deposit and credits led growth means the purpose of this study is to investigate the direction of this relationship. Methods: Johansen test of Co-integration and Granger Causality is employed by using time series data of Pakistan from 1961 to 2013. Results: The results show that two major activities of banking sector that are saving and lending don’t have any long run or short run causality towards economic growth so the general consideration of positive impact of these activities proved wrong in case of Pakistan. However there is unidirectional causality running from GDP growth to credit provided by banking sector which shows that economic prosperity or economic growth will have a major impact on lending activities of banks meaning that demand following hypothesis is true for Pakistan in case of GDP and Bank’s credit or we can say that growth led Bank’s credit in Pakistan. Conclusions: Hence Government and central bank should make policies by keeping this fact in consideration that bank’s two major activities that are saving and lending does not have impact on GDP growth. There might be other factors which influence economic growth of Pakistan more than banking sector these activities, which can be bank’s profitability, human resource, technology, infrastructure and other sectors of the economy. However GDP growth affects bank’s lending activities so during high economic growth year central bank and private bank’s management should introduce easy loans for businesses and industries and during poor economic growth years personal loan’s new schemes should be introduce by banks.