Economic growth in South-eastern Europe: the role of the banking sector

This article analyses the relationship between banking sector efficiency and economic growth using a panel data analysis of six South-eastern European countries during the period 1995-2005. The analysis is concentrated on the banking sector because other segments of the financial market are underdeveloped in our sample of countries. We measure the qualitative development in the banking sectors by using the margin between lending and deposit interest rates as well as the share of non-performing loans. By applying the panel data method in a growth-type equation setting, we confirm that improvements in banking sector efficiency, measured through the decreasing interest rate spread, exerted a positive influence on the growth rate of the countries in the region.