The Impact of the Banking Sector on Economic Growth in Saudi Arabia: An Empirical Analysis (2000-2020)

Abstract

The financial sector plays the essential role of intermediary acting as a capital allocation mechanism, it mobilizes financial resources to be used in the most efficient manner possible. The banking sector is pivotal in stimulating economic activities in various ways. This research empirically investigated the banking sector's impact on economic growth in Saudi Arabia, using annual time series data for the period (2000-2020) collected from the World Bank. The autoregressive distributed lag (ARDL) approach with bounds testing and the associated error correction model (ECM) are used to test whether there is a short and long-term relationship between the banking sector and economic growth in Saudi Arabia. The results show that there are positive and significant relationships between all the explanatory variables (banks deposit to GDP, domestic credit to GDP, liquid liabilities to GDP, and oil price), and economic growth in the long run. Still, in the short run, they are all positive and significant except (the bank deposit to GDP) is insignificant. The research recommends that there is are need to concentrate on policies that encourage bank credit to the private sector and encourage banks to raise liquidity by more supporting e-bank services because they are important indicators for economic growth.