A THESIS ON

CONTRIBUTION OF COMMERCIAL BANKS IN

ECONOMIC GROWTH OF NEPAL

Submitted by

Kishor Pokharel

P.U. Registration Number: 026-2-3-02293-2012

A thesis submitted to the

Purbanchal University, Faculty of Management

in partial fulfillment for the Degree of

Master of Business Administration (MBA)

Kathmandu, Nepal

December, 2016

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 CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

Economic growth is the increase in the amount of the goods and services produced by

an economy over time. Gross Domestic Product is the sum of money value of all final

goods and services produced within the domestic territory of a country during a year.

GDP represents the total dollar value of all goods and services produced over a

specific period (IMF, 2012). Banks contribution to private sector promotes economic

growth through capital accumulation and technological progress by increasing the

savings rate, mobilizing and pooling savings, producing information about

investment, facilitating and encouraging the inflows of foreign capital, as well as

optimizing the allocation of capital (World Bank, 2013).

Economic growth has been one of the major macroeconomic objectives of the

government of Nepal. Nepal Rastra Bank considers the monetary policy that supports

the growth rate and always directs Commercial Banks to create their credits to

productive sector (Timsina, 2014). Monetary policy is an effective tool to regulate the

economy under the liberalization policy frame. A well-developed banking system is

essential for the effective implementation of the monetary policy. Therefore,

Commercial Banks play an important role for the economic development in

developing economy (Paudyal, 2011). Thus, Banks and financial institutions (FIs) are

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very important for the economic growth of the nation. The role of banks and financial

institutions is similar to that of blood arteries in the human body, because they pump

financial resources for economic growth from the depositories to where they are

required (Bourke & Shanmugan, 1990).

Capital formation and investment are highly needed for the healthy economic growth

of the every country; Commercial Banks can act as financial intermediaries between

surplus and deficit units. Mainly Commercial Banks are financing the development of

trade, commerce, industry and agriculture, and make business loans, provide financial

resources for the growth of industrialization and also influence the direction in which

these resources are to be utilized (Joshi, 2010). Okwo (2012) examined the effect of

bank contributions to the private sector on economic growth in Nigeria and found that

bank credit to private sectors has a statistical strong positive relationship with GDP as

expected. Thus, they promote the efficient allocation of resources and accelerate

technological innovation and economic growth (King & Levine, 1993).

The study of the relationship between financial development and economic growth

can be traced back into the 19th century where Schumpeter (1912), who argued that

banks facilitate financial intermediation and promote economic growth by selecting

those entrepreneurs with the most innovative and productive projects. Later, Gurley &

Shaw (1955) showed, without the use of modern statistical tools, that the development

of the financial system has positive implications for the real economy, while Lewis

(1955) argued that the relationship between financial development and economic

growth runs in both directions. MacKinnon (1973) and Shaw (1973) suggested that

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state involvement in the development of financial systems can be an obstacle for

economic growth. Thus financial development was perceived to positively affect

growth.

In the context of Nepal, it is very difficult to trace the correct chronological history of

the Banking systems in Nepal because there are no sufficient historical records and

data about Banking in Nepal. Nepal bank Ltd. is the first modern bank of Nepal. It

marks the beginning of a new era in the history of the modern banking in Nepal. This

was established in 1937 A.D. Nepal Rastra Bank was established in 1956 A.D. as the

central bank of Nepal. Rastriya Banijya Bank, was established in 1965 A.D. as the

second commercial bank of Nepal. Nepal adopted liberal free economic policy since

from 1990s and allowed to establish other joint venture banks under collaboration

with foreign banks as well as under private sectors (Thapa & Rawal, 2010). After

declaring free economy and privatization policy, the government of Nepal encouraged

the foreign banks for joint venture in Nepal. Some foreign ventures are also

established in Nepal such as Nepal Bangladesh Bank, Standard Chartered Bank

(Greenlays Bank), Nabil Bank Ltd. (Nepal Arab Bank), Nepal SBI Bank, Everest

Bank, Himalayan Bank, etc. Today, the banking sector is more liberalized,

modernized and systematically managed. Nepal is less developed country, lies within

the two big economy’s i.e. India and China in the world. It has been well known that

trade; commerce and industry are the sign of the healthy economic growth of every

country. So, to overcome these things, investment is necessary. Such investment is

available only in bank and financial institution but the trend of economic development

of Nepal is still in grass root level.

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1.2. Statement of the Problem

The banking sector acts as the lifeblood of modern trade and commerce to provide

them with a major source of finance. Commercial bank occupies quite important place

in the framework of every economy (Hussain, 2010). The commercial banks play an

important role in accelerating the development of an economy. It is a known fact that

banks play several vital roles in any economy. These roles are aimed at ensuring

sound financial system and economic stability. It is undeniable that the banking

system is the engine of growth in any economy, given its function of financial

intermediation. Through this function, banks facilitate capital formation, lubricate the

production engine turbines and promote economic growth (Omankhanlen, 2012). Jalil

& Ma (2008) found that a positive and significant relationship between financial

development and economic growth exists in the case of Pakistan. But, in the case of

China, a positive and significant relationship for credit liability ratio and a positive,

yet insignificant, relationship with credit to private sector were found. Bell &

Rousseau (2001) evaluates the relationship between individual macroeconomic

indicators and measures of financial development in India and find that the financial

sector has been instrumental in promoting economic performance. Gerschenkorn

(1962) has focused on the key role of banking system in both short-run and long-run

economic growth.

Economic development of a country can be ensured either by optimally utilizing the

available resources or revamp the procedures to employ already available resources.

The banking sector plays a vital role in the developmental activities, as they offer

financial resources to the public and private sector for achieving the developmental

goals (Rehman, 2011). Levine (1997) has assessed theoretical and empirical

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evidences on finance growth nexus that the financial system that active role in the

economic growth. Development of financial institutions and markets are crucial for

the long run growth process. The development in the non-financial (i.e. real) sector,

information and technological changes, and other economic policy, legal and political

system and institutions have a direct influence in the development of financial system.

Commercial banks play significant role in the economic development in the nation. In

Nepal 29 commercial banks are in operation and providing services to the business

and industries through long-term and short-term loans and facilitating business for

foreign exchange and remittance via national and international network. Various

research papers have been published by various researcher come up with different

results. Bhetuwal (2007) and Poudel (2005) found that financial development

contributes positively to domestic growth. On the other hand, Shrestha (2005) did not

find any significant relationship between economic growth and financial

development. Likewise, Khatri (2008) also did not find any significant relationship

between financial institutions and economic growth. In this context of mixed results,

the appropriate result is essential that shows the contribution of commercial banks in

the economic growth of the nation. Moreover, there is no any study specifically in

relation with banking performance determinants of Nepal. So, the purpose of the

study is to determine the efficiency of performing indicators of banking industries and

its relation on economic growth.

Though there are above mentioned empirical evidences in the context of other

countries, no such evidences exist in the context of Nepal. The observed literatures

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have shown mixed evidences exist on the contribution of banking sector in economic

growth. This study does not consider the impact of financial system in the economic

growth of the nation. The main issue of this study is to examine the contribution of

commercial banks in economic growth of Nepal.

1.3. Research Questions

The study focuses on the contributions of commercial banks in economic growth of

Nepal. This study therefore is an attempt to addresses the following issues:

i. What is the situation of economic growth in Nepal?

ii. What are the impacts of commercial banks in economic growth of Nepal?

iii. To determine the efficiency of performance indicators of commercial bank and

its relation with economic growth?

iv. Do the Commercial Banks invest in productive sectors of the economy?

1.4. Objective of the Study

The major objective of the study is to examine the contribution of commercial banks

to the economic growth of Nepal. The specific objectives are:

i. To examine the trend and pattern of economic growth and credit system of

Commercial Banks.

ii. To explore the relationship between Commercial Banks contributions and

Economic growth (GDP) of Nepalese economy.

iii. To examine the impact of deposits, investment, loans & advances and

interest earnings growth on GDP.

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 iv. To analyze the total deposit collection and utilization of commercial banks

in Nepal.

1.5. Significance of the Study

Commercial banks play an important and active role in the economic growth of a

country. If the banking system in a country is effective, efficient and disciplined it

brings about a rapid growth in the various sectors of the economy. The significance of

commercial banks in the economic growth of a country are banks promote capital

formulation, investment in new enterprises, balanced development of different

regions, influencing economic activities, implementation of monetary policy and

monetization of the economy. The commercial banks are now not only confined to

local banking, they are vastly changing into global banking, i.e. understanding the

global customer, using latest information technology, competing in the open market

with high technology system, changing from domestic banking to investment banking.

The commercial banks are considered as the nerve of all economic development in the

country.

This study will help to gain some important knowledge regarding the contribution of

the commercial banks in economic growth. Moreover this study helps future

researchers and students who are interested to study and conduct research in the same

topic.

1.6. Research Hypotheses

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To study the contribution of the commercial banks in economic growth, some

hypotheses are set. They are as:

Hypothesis 1:

Null hypothesis Ho: There is significant impact of commercial banks contribution on

economic growth of Nepal.

Alternative hypothesis H1: There is no significant impact of commercial banks

contribution on economic growth of Nepal.

Hypothesis 2:

Null hypothesis Ho:: There is significant relationship between the growth of GDP and

contribution of Commercial Banks.

Alternative hypothesis H1: There is no significant relationship between the growth of

GDP and contribution of Commercial Banks.

1.7. Operational Definitions and Assumptions

This sections deal with major assumptions and operational definitions of

terminologies used in this study. Meanings of some of the terminologies are as

follows:

i. Nominal Gross Domestic Product

GDP is the sum total of consumption expenditure, investment expenditure,

government expenditure and net foreign exports of a country during a year.

The Nominal Gross Domestic Product measures the value of all the goods and

services produced expressed in current prices. Nominal GDP has not been

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 adjusted for inflation. Nominal GDP is used as dependent variable as it the

indicator of the economic growth.

ii. Deposits

Money placed into a banking institution for safekeeping. Bank deposits are

made to deposit accounts at a banking institution, such as savings accounts,

checking accounts and money market accounts. Deposit can be used as

independent variables banks can utilize deposit money for investment purpose

which helps in the economy development.

iii. Investments

Investment is the major part of the return of the bank. It is investment is

putting money into something with the expectation of gain. It is the action or

process of investing money for profit. So investment can be used as

independent variable to see banks contribution in economy.

iv. Loan and Advances

The term ‘loan’ refers to the amount borrowed by one person from another.

The amount is in the nature of loan and refers to the sum paid to the borrower.

Advance is a ‘credit facility’ granted by the bank. However, these two terms

are used interchangeably. Loan and Advances is the extension of money from

a bank to another party with the agreement that the money will be repaid. It is

a loan made by a bank to a customer, usually against the security of a property

or asset. Loan and advances granted by commercial banks are highly

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 beneficial to individuals, firms, companies and industrial concerns and meet

short-term and long term financial needs of business enterprises. Loan and

advances is considered as independent variable.

v. Interest Earnings

An amount earned by a company on its interest bearing bank accounts or other

investments. The amount should be reported as Interest Revenues, Interest

Income, or Investment Revenues in the accounting period in which the interest

is earned. Interest Earnings is amounts from interest on all interest-bearing

deposits and accounts; accrued interest on investment securities sold; interest

on funds held for construction; and interest related public debt for private

purposes. It is considered as explanatory variable.

1.8. Limitations of the Study

The limitations of the study are as follows:

 The primary study is conducted with reference to 8 different Nepalese

commercial banks within Kathmandu valley only and may not represent the

entire banking industry.

 The sample size for the study is limited so further study can be done by taking

large sample size for longer time period as the study could not be generalized

from limited data.

 The model used in this study is limited on regression. Simple statistical tools

are used in order to avoid complexity.

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  There are many performing indicators of commercial banks which have its

impact in economic growth. But only few are considered for the study so

several other variables could be considered in the future research.

 This study is based on the officially published data within some limitations. So

the study is not free from weakness because of time and resource constraints.

 Reliability of study depends upon the reliability of published data and

genuineness of the respondents. This study has covered only the Commercial

Banks of Nepal even though many financial institutions contribute in the

economic growth of Nepal.

1.9. Organization of the Study

This thesis is divided into five different chapter which are as follow: The first chapter

consists of background of the study including statement of the problem, objectives of

the study, operational definitions and assumptions, limitations of the study and

organization of the study. The second chapter includes review of literatures related to

studies in global context as well as the review of studies in Nepalese context.

Basically, review is based on economic journals, articles, websites, various

publications of NRB, MOF and other relevant materials. Besides, this also consists of

research gap associated with the studies and conceptual framework. The third chapter

covers research design, nature and sources of data, selection of enterprises, models

used for data analysis, population and sampling of the study, data collection and

processing techniques, analysis of tools and conclusion along with the limitations of

the study. The fourth chapter focuses on the systematic presentation, analysis and

discussion of data. The fifth chapter provides a summary of overview on all works

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carried out in chapter one through four including major conclusions derived from the

study. This chapter also includes a separate section for recommendations and scope

for future research based on major findings of the study.

CHAPTER TWO

REVIEW OF LITERATURE

Review of literature is an important part of the research study. It is the process of

reading and evaluating the existing materials in the area of interest. When the

researcher studies the existing literature, it helps to increase the knowledge of the

researcher in the area of interest. By means of literature review, the researcher can

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identify what has been studied in the past, what type of conclusion has been derived in

the past, and so on. Depending upon the past study, the researcher can design his

study. He always tries to study that thing which has not been studied in the past.

Review of literature also helps the researcher to select a particular methodology of the

study (Bhattrai,2010).

This chapter provides conceptual framework of the study and deals with review of

empirical studies associated with commercial banks and economic growth. It is

divided into two sections. First section consists of an in-depth review of related

studies and second sections presents a conceptual framework of the study. This

section also deals with a brief review of empirical works in the context of Nepal.

2.1. Review of Related Literature

A literature review is the act of analyzing as well as critically finding the similarities

and differences in the previous related studies. In this section, the brief review of

existing studies, pertinent to present research has been presented. This section is

divided into two different parts. First part deals with the major studies or foreign

article whereas; second part deals with related studies in Nepalese context. The

review of literature has been conducted based on the chronological order and

categorize into two different studies as under:

a) Review of International Studies

b) Review of Nepalese Studies

a) Review of International Studies

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There are many studies conducted by different researchers on the relationship

between commercial bank and economic growth. Table 2.1 shows some of the review

of major literature International studies on the impact of commercial bank in the

economic growth with major findings of the studies.

Table 2.1

Review of literature of International Studies

Researchers and Date Major Findings

Tuuli Koivu (2002) The results of the study show that the interest rate margin

is significantly and negatively related to economic

growth.
Hondroyiannis, Lolos The empirical results, suggest that there exists a bi-

and Papapetrou (2004) directional causality between finance and growth in the

long run and also show that both bank and stock market

financing can promote economic growth, in the long run.

Ardic and Damar The study revealed that there is a strong negative

(2006) relationship between financial deepening both public and

private and economic growth.

Furqani and Mulyany The results show that in long-run, Islamic bank financing

(2009) is positively and significantly correlated with economic

growth and capital accumulation.

Burzynska (2009) The study indicated that there is bidirectional Granger-

causality between economic growth and credit extended

by policy banks, operations of rural credit cooperatives

and there was unidirectional causality from economic

growth to financial development.

Monnin and Jokipii The findings of the study shows there is positive link

15
(2010) between banking sector stability and real output growth.
Korner and Schnabel The findings of the study revealed the impact of public

(2010) ownership in the banking system on subsequent per

capita GDP growth depends strongly on a country’s stage

of financial development and on the quality of its

political institutions.
Yazdani (2011) The obtained results indicate that there is definite

influence of privately owned banks in the economic

growth of Iran.
Asante and Agyapong The findings of the study indicated that banking

(2011) competition and stock market development Granger

Cause economic growth in Ghana.

Rehman (2011) The main findings of the study were that there is positive

relationship between economic growth with deposits,

lending and savings, and negative relationship with

inflation and interest rate.

Abduh and Chowdhury The main findings of the study were that Islamic bank

(2012) financing has shared long run positive relationship with

economic growth.
Aurangzeb (2012) The results indicate that deposits, investments, advances,

profitability and interest earnings have significant

positive impact on economic growth.

Omankhanlen (2012) The study demonstrated that the commercial banks have

significant role to play in capital formation in the

Nigerian economy and also have vital roles to play in the

nation’s economic growth.

Cojocaru, Hoffman and The findings of the study show that credit to the private

Miller (2012) sector plays a positive and economically large role in

16
 spurring economic growth in these transition economies.
Thivuong (2013) The study concludes that Nepal should expand and

improve their credit and investment system through

appropriate regulatory and policy reforms in order to

support higher economy growth.

Saini and Sindhu This study also shows that Commercial Banks are helpful

(2014) in development of country and in comparison between

rural and urban area urban area are more developed.

Koivu (2002) established that an efficient banking sector accelerates economic growth

in transition countries. The study analyze the finance-growth nexus using a fixed-

effects panel model and unbalanced panel data from 25 transition countries during the

period 1993-2000 and found that the interest rate margin is significantly and

negatively related to economic growth. The result is consistent with theoretical

models that find banking sector efficiency important for economic growth. On the

other hand, a rise for credit does not seem to accelerate economic growth and its

lagged value is even negatively related to economic growth and the causality between

the growth of credit and real GDP growth is unclear.

Hondroyiannis et al. (2004) conducted a study about the financial markets and

economic growth in Greece. The objective of the study was to assess empirically the

relationship between the development of the banking system and the stock market and

economic performance for the case of Greece using error-correction models. The

findings of the study showed that both bank and stock market financing can promote

economic growth, in the long run, although their effect is small. Furthermore, the

17
contribution of stock market finance to economic growth appears to be substantially

smaller compared to bank finance.

The study on financial sector deepening and economic growth of turkey using a

province-level data set for 1996-2001 by Ardic & Damar (2006). The objective of the

study was to provide an analysis of the contribution of the developments in the

Turkish banking sector to regional economic growth in Turkey. The findings of the

study show that there is a strong negative relationship between financial deepening

both public and private and economic growth. In light of the developments in the

period of analysis, this result was not surprising, as the main function of the banking

sector at that time was to provide financing for the Turkish Treasury, which channeled

these funds to the government albeit mainly for rent distribution purposes.

The study on Islamic banking and economic growth: empirical evidence from

Malaysia depicted that in the short-run only fixed investment that granger cause

Islamic bank to develop whereas in the long-run there is evidence of a bidirectional

relationship between Islamic bank and fixed investment (Furqani and Mulyany,

2009). The objective of the study was to examine the dynamic interactions between

Islamic banking and economic growth of Malaysia. The Co-integration test and

Vector Error Model (VECM) were used to see whether the financial system

influences growth and growth transforms the operation of the financial system in the

long-run. For study purpose, time series data had been used of total Islamic bank

financing and real GDP per capita, fixed investment and trade activities to represent

real economic sectors. The results show that in long-run, Islamic bank financing is

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positively and significantly correlated with economic growth and capital

accumulation of Malaysia.

In an attempt to examine the financial development and economic growth of Chinese

banking sector by using unit root test and augmented Dickey-Fuller test by Burzynska

(2009). The main objective of the study was to investigate the issue of finance-growth

nexus in China and to determine the contribution of different banking institutions to

growth. The main findings of the study were there is bidirectional Granger-causality

between economic growth and credit extended by policy banks. Similar causality

exists between economic growth and operations of rural credit cooperatives. Also

state-owned commercial banks and other commercial banks are economically related

to economic growth. However, there was only a unidirectional causality from

economic growth to financial development.

The impact of banking sector stability on the real economy investigated by Monnin &

Jokipii (2010) using a panel VAR methodology for a sample of 521 banks covering

18 OECD countries for the period between 1980Q1 and 2008Q4. The objective of the

study was to explore the relationship between banking sector stability and the

subsequent evolution of real output growth and inflation. The findings of the study

shows there is positive link between banking sector stability and real output growth. It

also shows that banking sector stability (instability) results in a significant

underestimation (overestimation) of GDP growth in the subsequent quarters.

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Korner & Schnabel (2010) examined the study on public ownership of banks and

economic growth- the role of heterogeneity. The objective of the study was to

examine to check whether the effect of public ownership in the banking sector on

economic growth is heterogeneous across countries. The samples consists of 10

largest commercial or development banks in each country from 78 countries and

compute the amount of assets owned by the state, taking direct ownership and

ownership via state-owned shareholders into account. The findings of the study

revealed the impact of public ownership in the banking system on subsequent per

capita GDP growth depends strongly on a country’s stage of financial development

and on the quality of its political institutions. In hardly developed countries with low

financial development and poor political institutions, the impact of public ownership

of banks on economic growth is strongly negative.

The role of performance of privately owned banks in economic growth of Iran using

descriptive analysis and inferential analysis was examined by Yazdani (2011). The

main objective of the study was to examine the role of financial systems with focus on

private banks in the economic growth of the Islamic republic of Iran. The data has

been collected for the period between 2002 and 2007 and six private bank of Iran was

taken as sample. The obtained results indicate that there is definite influence of

privately owned banks in the economic growth of Iran.

The study about the bank competition, stock market and economic growth in Ghana

using Autoregressive Distributed Lag (ARDL)/ Dynamic Ordinary Least Square

(OLS) approach was conducted by Asante & Agyapong (2011). The objective of the

20
study was to examine the long-run relationship between economic growth and two

financial sector indicators; bank competition and stock market development. The data

were collected from secondary sources and time series data were used for the period

between 1992 and 2009. The findings of the study indicated that banking competition

and stock market development Granger Cause economic growth in Ghana. The long

run estimation showed that banking competition is good for economic growth.

However, there was a disproportionate response of economic growth to stock market

development. The researcher recommended that policy to promote banking

competition should be vigorously pursued.

Rehman (2011) investigated banking reforms and economic growth in case of

Pakistan. The objective of the study was to explore impact of financial reforms on

economic growth of Pakistan and Explore relationship among economic growth,

deposits, lending, real interest rate, savings, and inflation. The data were collected

from secondary sources i.e. from annual reports and statistical hand book of central

bank, and economic survey of Pakistan. The main findings of the study were that

there is positive relationship between economic growth with deposits, lending and

savings, and negative relationship with inflation and interest rate. Better performing

banking sector is now helping Pakistan to achieve higher growth rates. Financial

reforms have a significant impact on the banking sector and economic growth. The

author recommended that the government should remove the interest rate ceiling and

overcome the problem of inflation.

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In an attempt to examine whether Islamic banking matter for economic growth in

Bangladesh or not using co-integration and granger’s causality method was carried by

Abduh & Chowdhury (2012). The main objective of the study was to investigate the

long run and dynamic relationship between Islamic banking development and

economic growth in the case of Bangladesh. The quarterly time series data from

Q1:2004 to Q2:2011 of the total deposits and financing of Islamic banking and

economic growth (GDP) were used in this study. The main findings of the study were

that Islamic bank financing has shared long run positive relationship with economic

growth. The relationship appears to be bi-directional relationship between Islamic

bank deepening and economic growth. It implies that the development of Islamic

banking will also support the goal of the country in improving their income.

Aurangzeb (2012) carried out a study on the contributions of banking sector in

economic growth of Pakistan. The objective of the study was to determine the

efficiency of performing indicators of banking industries and its relation on economic

growth of Pakistan using Augmented Dickey Fuller (ADF) and Philip Perron unit root

test, ordinary least square and granger causality test. The data were collected from

secondary sources i.e. from different official publications of respected banks and State

bank of Pakistan.

The main findings of the study were that forecasts generated from unit root test that

confirms the stationary of all variables at first difference. Regression results indicated

that deposits, investments, advances, profitability and interest earnings have

significant positive impact on economic growth of Pakistan. The Granger-Causality

22
test confirms the bidirectional causal relationship of deposits, advances and

profitability with economic growth and unidirectional causal relationship of

investments and interest earnings with economic growth. The researcher made

recommendation that the policy makers should make policies to enhance the banking

sector in Pakistan because banking sector is significantly contributing in the economic

growth of Pakistan.

In an effort to examine the role of banks in capital formation and economic growth of

Nigeria (Omankhanlen, 2012). The main objective of the study was to empirically

investigate the role of Nigerian banks in capital formation and economic growth. The

annual time-series data were collected from various issues of central bank of Nigeria

Economic and financial Review; Annual reports and Statement of Accounts; and

Principal Economic and Financial Indicators, and Central bank of Nigeria Statistical

bulletin. The findings of the study show that the commercial banks have significant

role to play in capital formation in the Nigerian economy and also have vital roles to

play in the nation’s economic growth. The researcher recommended that adequate

efforts should be made by banks to increase their level deposits as that will help in

increasing the nation capital formation; banks should also be made to increase their

investment portfolio within the country as that will equally help in increasing the

nation capital formation and economic growth and finally, the further research should

be carried out to investigate the non-conformity of the coefficient investment by

commercial banks to the a-priori expectation of having a positive relationship with

capital formation.

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Cojocaru et al. (2012) examined the study on financial development and economic

growth in transition economies of the Communist countries of Central and Eastern

Europe (CEE) and Commonwealth of Independent States (CIS) countries. The

objective of the study was to investigate the effect of financial sector development on

economic growth in the former CEE and CIS Communist countries over the transition

years from 1990 through 2008. The findings of the study show that credit to the

private sector plays a positive and economically large role in spurring economic

growth in these transition economies. Additional indicators of financial depth such as

liquid liabilities and domestic credit also have positive effects, but they are not

statistically significant at conventional levels. High interest rate spreads negatively

affect economic growth and the statistical significance of the coefficient is maintained

even when private credit is included in the regression. The study found no evidence

that net interest rate margins affect growth, and that overhead costs do. However, high

bank concentration a possible underlying cause of the large interest rate spread seems

to lower economic growth.

Thivuong (2013) examined his research on relationship between financial

development and economy with the central objective to investigate the relationship

between banking industry performance and economy in Nepal over the period of 1994

to 2011. The empirically methodology is based on regression analysis.

This study found that the deposit ratio is better influence in the economy of Nepal.

Similarly, credit ratio, investment ratio and term deposit ratio has not found as driver

of Nepalese economy. In the contrast of other findings, it is found that current deposit

ratio has negative influence on Nepalese economy. One possible explanation may be

why other financial development indicator is not stimulating the economy that for the

24
financial development it is essential that expansion of the financial system be

accompanied by allocating creation of funds towards investment activities. So, this

paper suggests that countries should promote economic growth in order to encourage

and thus benefit from financial development. The study concludes that Nepal should

expand and improve their credit and investment system through appropriate

regulatory and policy reforms in order to support higher economy growth. Besides

this, other implication for policy is that effort geared towards promoting domestic

investment.

Saini and Sindhu (2014) have conducted a research study with the main objective to

find out how the Commercial Banks are helpful in credit, employment generations in

rural areas and how it contribute in development of Indian economy. The research of

this study is based upon descriptive analysis and it is an empirical research on the

secondary data analyzing stated objectives.

This research finding and policy implications are RBI and government are taking their

full steps in modifying the present conditions of the agriculture sector in India. There

is a sigh of relief for the rural poor from the dreaded clutches of money lenders. This

study revel that 66 percent people are still not able to fulfill the loan amount of banks.

Commercial Banks providing credit to the poor farmers but this is not free from the

other problems. Commercial Banks are providing 43.1 percent of total agriculture

credit. This study concludes and recommended that, Indian agriculture suffers mainly

because of expensive credit, a distorted market, intermediaries, controlled prices and

poor infrastructure. It has also suffered because of poor irrigation facilities, use of

traditional technology and practices, farmer's poor economic status, fragmented

landholdings, lack of post harvest infrastructure and lack of farm extension. Banks

25
should consider these facts to harvest more in infrastructure facilities like irrigation

facilities, processing, storage and marketing activities. Such agricultural infrastructure

can be improved by banks, as there are ample prospects for banks to invest in the

above activities. This is because of low credit and less contribution of agriculture

sector in GDP of India. Finally this study recommends that to improve agriculture

sector of India.

As the world Economic Outlook (2015) states, growth in advanced economies in the

first half of 2015 remained modest. For most emerging market economies, external

conditios are becoming more difficult. Financial market volatility rose sharply during

the summer, with declining commodity prices and downward pressure on many

emerging market currencies.

b) Review of Nepalese Studies

On the contrary to the number of studies associated with impact of financial

institution and economic growth, there are few empirical works in the context of

Nepal. This sub-section provides review of empirical works associated with

contribution of financial institution in economic growth of Nepal. A brief overview on

some related studies with their major findings is provided in the Table 2.3.

Table 2.2

Review of Nepalese Studies

Researchers and Date Major Findings

Khatri, Aryal and The main findings of the study were that the relevant

Sapkota (2008) ratios of commercial banks such as deposit, investment,

26
 and profitability are found to be in increasing trend.
Bhandari (2011) The study found that the commercial banks play

important role for economic growth in the short run than

long run.
Acharya (2012) The main findings of the study were that there is

existence of co-integration implies that there is long-run

or equilibrium relationship between financial

development and economic growth.

Pokharel(2013) The study concluded that the contribution of the

commercial bank in mobilizing and utilizing the

financial resources for economic development is

significant.
Gautam (2014) The main finding of the study was that financial

development matters for economic growth and

economic growth sustains for the financial development

along with imperative to undertake policy measures to

make the financial system more inclusive without losing

stability even in changing times.

Khafle (2015) This study concludes that overall investment is

important to economic growth but in comparison to

government investment private sector investment has

great role in nation capital formation.

Dhakal (2015) This main finding of the study was increase in credit

volumes of commercial banks has positive effect on

Nepal’s GDP and ultimately increased economic

growth.

27
In an attempt to address the Financial Institutions and Economic Growth in the

context of Nepal, Khatri et al. (2008) examined relationship between financial

institutions and economic growth of Nepal. The objective of the study was to

investigate the contribution of Financial Institutions to the economic growth and study

the development of the commercial banks in Nepal in recent decades. The data were

collected from secondary sources i.e. from the Nepal Rastra Bank Bulletin, Yearly

Economic Survey, Annual Reports of Commercial Banks, Statistical Pocket Book,

publications of World Bank and International Monetary Fund. The sample data used

in this research is comprised of 14 commercial banks during the period of 2001 to

2015. The main findings of the study were that the relevant ratios of commercial

banks such as deposit, investment, and profitability are found to be in increasing

trend. The growth rate of GDP/capita is however volatile and the regression result of

Deposit/GDP is weakly significant. The investment growth rate is not significant at all

possibly due to the time lag of the effect of investment on the economic development.

The Growth rate of GDP and investment over GDP is positive related.

The study on financial institutions, the role of banks and economic growth was

investigated by Bhandari (2010). The objective of the study was to make a

contribution towards the understanding of the relationship between financial

institutions, the banks and economic growth in Nepal. The main findings of the study

were that the overall financial institutions development matter for the growth. The

result showed that the commercial banks play important role for economic growth in

the short run than long run.

28
Acharya (2012) analyzed the depth of financial development and economic growth of

Nepal. The objective of the study was to examine the direction of causality between

the depth of financial development and economic growth of Nepal. The sample data

has been used for time period of 37 years i.e. from 1975 to 2011 for the financial

depth and economic growth of the country. The study revealed that there is existence

of co-integration implies that there is long-run or equilibrium relationship between

financial development and economic growth. The findings of this study had been

constrained by the limited number of observations of time series due to unavailability

of quarterly data of Nepalese financial development indicators and GDP.

Nepalese Commercial Banks, Lending and the Economic Growth was examined by

Yasodha Pokharel (2013). Based on the objective set out in this study, while assessing

the role of commercial bank in Nepalese economy, the result of regression in equation

number has justified that the credit made by the commercial bank has positive effect

on the economic growth of the country represented by the gross domestic product. To

compare the role of commercial bank, the result of the descriptive analysis shows that

the share of commercial bank in the total assets of the whole financial system is

increasing every year, so we can conclude that the contribution of the commercial

bank in mobilizing and utilizing the financial resources for economic development is

significant. The result while testing the relationship of credit with the total sources of

funds and number of commercial bank show the favourable result and the regression

coefficients are also in line with the hypothesis set out in this study. This is also same

in the test of relationship between the gross domestic products with credit made by the

commercial bank.

29
Role of Financial Development in Economic Growth of Nepal: An Empirical

Analysis was studied by Ph. D. Bishnu Pd. Gautam (2014) under NRB working paper

series. The focus of this study was the relationship and causality between financial

development and economic growth, which is found to be positive and significant. Not

only this, it also found that financial development matters for economic growth and

economic growth also sustains for the financial development. The study supports both

demand driven and supply leading hypotheses in case of Nepal. It is consistent with

the results of Islam et. al(2004) that used the data for Bangladesh, Tahir (2004) that

used data for Pakistan and also with Kharel and Pokhrel (2012) that used data for

Nepal, to some extent. However, it differs with Timsina (2014) regarding the

direction of causality between bank credit and economic growth only. This study

assessed the impact of private sector credit of banking system in contrast to Timsina

(2014) which used credit of commercial banks only in real terms. Nevertheless, the

conclusion of this paper should be analyzed cautiously considering sample size,

financial structure and level of development.It is necessary to undertake necessary

measures to enhance the growth in both financial and economic activities considering

the potential and bidirectional causality between financial development and economic

growth in Nepal. Similarly, it is necessary to create investment friendly environment

to encourage the investment and growth. There remains, however, the challenge of

more reforms and consolidation that are needed to increase further the performance

and competitiveness of the financial sector. Though the relationship seems to be

strong, it would be imperative to undertake policy measures to make the financial

system more inclusive without losing stability even in changing times.

30
A time series analysis of investment and economic growth in Nepal was investigated

by Sharmila Khafle (2015). The aim of the study is to carry out the short-run

relationship and short run dynamics. The results conclude that in the short-run, the

relationship between the two variables GDP and private Investment is significant

implies, short run relationship. Whereas, Government Investment is insignificant

implies there is no short run relationship between GDP and Government Investment.

However, regarding the dynamics the negative sign on the error correction term

shows that in cases of any deviation of investment in the short-run, it will be adjusted

to its long run equilibrium path. Concerning the speed of adjustment based on the

Engle-Granger approach 10% of the deviation of GDP from its long-run path is

adjusted in each year. Moreover, the study of trend analysis of trend and pattern of

investment, we came to know that government fixed capital formation and private

fixed capital formation increased by 665.23 percent and 828 percent respectively. The

interesting facts that lies in this study was that in 2005/06 government fixed capital

formation to GDP was at low level whereas, private fixed capital formation as a

percentage of GDP had reached in high level. Lastly, we show the relationship

through using econometrics tools and techniques.

Dhakal (2015) examined, contribution of commercial banks to the economic growth

of Nepal was This study concludes based on objective set out while assessing the role

of Commercial Banks in Nepalese economy. The result of regression has justified that

credit of Commercial Banks have positive effects on the economic growth of a

country represented by the GDP. Basically, this study investigates the contribution of

Commercial Banks in Nepal’s GDP which ultimately contributes the economic

growth of Nepal. The research shows that there is positive and significant relationship

31
between GDP and credit growth of Commercial Banks. The regression analysis of

1976 to 2014 concludes that credit of Commercial Banks have positive impact in

Nepal’s GDP. Similarly, the trend of GDP and credit of Commercial Banks shows

increasing tendency and the volume of credit of Commercial Banks increasing way,

which has positive effect on Nepal's GDP and ultimately increased economic growth

of Nepal. Thus, this research concludes that increasing of credit volume helps the

economic growth of Nepal.

The findings of the study shows that only deposit has positive impact on the Nepalese

economy among the other used variable in the study. The findings imply that Nepal

can accelerate their economy by improving their financial system through effective

regulatory policy reform. The deposit ratio is better influence in the economy of

Nepal. Other variables investment ratio and term deposit ratio has not be found as

driver of Nepalese economy. The study concludes that Nepal should expand and

improve their credit and investment system through appropriate regulatory and policy

reforms in order to support higher economy growth.

Therefore, this study attempts to examine the contribution of commercial banks in

economic growth of Nepal. Though there are above mentioned studies exist in case of

the developed economies, no such studies exist in the context of Nepal using both

primary as well as secondary data.

2.2. Research Gap

This study is about the contribution or impact of commercial bank in economic

growth of the nation which is an important study to know whether there is any role of

32
banks in economic growth or not. There has been number of studies about the banks

and economic growth in case of other countries but not in the context of Nepal. The

financial institutions are important for the long run economic growth of the nation.

Review of different literatures reveals that the different researchers conducted a study

on banks and economic growth in a different way in different period and used

different methodologies for their empirical studies according to the research purpose.

The observed literatures have shown mixed evidences exist on the contribution of

banking sector in economic growth.

In the context of Nepal only few efforts has been made to examine the financial

institution and economic growth. But no any research has been made on the

contribution of commercial banks in economic growth so there remains enough

ground to carry on further researches. Wide ranges of studies are yet to be made in

Nepal that will enable to test the relevancy of results that were obtained from other

countries research. Thus, this study is an attempt to examine the contribution of

commercial banks in economic growth of Nepal.

There can be more rooms for further research by incorporating the data of other

financial institutions including provident fund, stock exchange and insurance

companies as well as incorporating alternative measures of financial and economic

development.

2.3. Conceptual Framework

33
The banking sector plays a key role in development of a national economy because its

functions as medium of collecting and mobilizing resources to finance a business and

development project that are essential for economic development. The specific roles

of bank in economic growth are not clearly defined in any formal theories. However,

according to various theoretical literatures about finance and economic growth are

based on banks’ role in the economy. Theoretical framework is a basic conceptual

structure organized around a theory. It defines the kinds of variables that are going to

be used in the analysis. In this study, GDP is the dependent variable. Four different

independent variables are Deposits, Investments, Loan & Advances, Interest Earning.

Therefore, the variables with their notations and their measures are illustrated on the

table below:

Table 2.3

The variables Notation and the Measures

Variables Notations
Dependent Variables Nominal Gross Domestic Product NGDP
Dependent Variables Deposits DEP

Investments INV

Loans and Advances ADV

Interest Earning INE

Source: Field Survey, 2016

Hypothesis 1: NGDPt = α + β1 DEPt + β2 INVt + β3 ADVt + β4 INEt + Ut

where, NGDP = Nominal Gross Domestic Product, DEP = Deposits, INV =

Investments, ADV = Advances, , INE = Interest Earning, β1, β2, β3 and β4 =

Parameters and U = Error term (it is normally independently identically distributed)

34
The Hypothesis 1 equation with its dependent and independent variables can be

depicted with the help of the diagram which is shown in the figures below:

Figure 2.1

Conceptual Framework for Hupothesis 1

Deposits

Investments

Nominal Gross
Profitability
Domestic Product

Loans & Advances

Interest Earning

Figure 2.1 demonstrate the conceptual framework for first model which this study has

been based. As shown in figure the dependent variable is Nominal Gross Domestic

Product and independent variables are deposits, investments, advances and interest

earning. These variables will be used to examine the impact of commercial banks in

economic growth of the nation.

35
 CHAPTER THREE

RESEARCH METHODOLOGY

Research methodology sets out overall plan associated with a study. It provides a

basic framework on which the study is based on. Research methodology is the process

of getting solution of the problem through planned and systematic dealing with the

collection, analysis and interpretation of the study area. Before presenting the

analysis and interpretation of data, it is necessary that research methodology be

described first. This chapter therefore explains the methodology that is employed in

this study which includes various sections describing research plan and design,

description of the sample, instrumentation, data collection procedure and time frame,

validity and reliability of the study and analysis plan.

3.1. Research Plan and Design

This study has employed descriptive and causal comparative research designs to deal

with the fundamental issues associated with the efficiency of performing indicators of

commercial banks and its relation on economic growth. The descriptive research

design has been adopted for fact-finding and searching adequate information about

the factors affecting commercial banks and economic growth. This design has also

been employed to assess the opinions, perceptions, and characteristics of respondents

i.e. employees of commercial banks with respect to performing indicators of

commercial banks and its relation on economic growth. Besides, an effort has also

been made to describe the nature of time-series data of commercial bank by using

36
descriptive statistics with respect to variables such as nominal GDP, deposits,

investments, loans and advances, interest earnings. Similarly, this study analyzes

descriptively the resource mobilization and utilization of Commercial Banks. This

study describes the financial development of Nepalese economy and especially the

role of Commercial Banks in economic growth of Nepalese economy.

Moreover, this study depends on correlation research design in order to ascertain the

directions and magnitudes of the correlation among the dependent variable i.e.

Nominal Gross Domestic Product and the independent variables. Furthermore, this

study has employed causal comparative research design in order to observe the

direction, magnitudes and relationship between performing indicators of commercial

banks and economic growth. So, it helps in analyzing the cause and effect relationship

among the different variables used for this study. Moreover, it also helps to identify

the most influencing indicators of commercial banks. The basic purpose of employing

causal comparative research design in this study is to understand and examine the

impact of commercial banks in economic growth. Other methodological issues

associated with this study are dealt extensively in the respective sections.

3.2. Description of the Sample

The population of this study includes all the Nepalese commercial banks. A total of

29 commercial banks are being operated in the country. The populations of this study

were selected to make the study more reliable and data were taken for 15 continuous

years from the fiscal year 2001 to 2015.

37
This study is also based on the primary data generated through questionnaires. The

questionnaires were distributed to 120 respondents and out of 120 questionnaires,

only 75 questionnaires were received in useable form. The respondents were selected

on stratified basis and these 120 respondents represent 8 banks. In selecting the most

reliable and representative samples, first the population of this study were stratified

into different sectors and then the banks from different stratum were selected. The

detail about samples for secondary data collection and analysis is as follows:

Table 3.1

Selection of Banks for Primary Data

S.N. Banks Ownership No. of

Structure Observations
1 Nepal Bank Ltd. Public Bank 13
2 Rastriya Banijya Bank Ltd. Public Bank 9
3 Nabil Bank Ltd. Privately Owned 10

Bank
4 Nepal Investment Bank Ltd. Privately Owned 8

Bank
5 Himalayan Bank Ltd. Privately Owned 10

Bank
6 Machhapuchhre Bank Limited Privately Owned 10

Bank
7 Everest Bank Ltd. Privately Owned 7

Bank
8 Standard Chartered Bank Privately Owned 8

Bank
Total Observations 75
Source: Field Survey, 2016

38
3.3. Instrumentations

In this study, both primary as well as secondary data were used. Different data

producing instruments were used in this study. For the purpose of primary data

collection, a set of questionnaire was developed. Survey in the form of questionnaires

was chosen for this study. The questions were identified from the previous studies and

modify as per the requirement in the context of Nepal. The questions were designed in

such a way that helps to get the opinion, perceptional views and feelings of the

respondents. Data were collected using well formulated questionnaires. During the

survey; discussions with the respondents and information collected through

discussions and interviews along with questionnaires were used as instrument which

copy is included in the appendix.

Questionnaires are divided into two parts. The questions in this study are both close-

ended and open-ended. In the first part, the respondents’ profile was asked such as

gender, position, etc. The second part comprise of 29 close-ended questions and 2

open-ended to measure independent and dependent variables. The close-ended

question includes yes/ no types, multiple choices, rankings and 5-point likert scales

types of questions.

3.4. Reliability of the scale

The reliability and validity of the data for the study purpose and its findings were

check by using the statistical tool SPSS. The reliability of study has been measure by

using consistency and stability of the respondents’ response in primary data extracting

39
sources in secondary data. The major use of reliability coefficients is to communicate

the repeatability of results. Statistically, Cronbach’s alpha is a reliability coefficient of

internal consistency, that is, how closely related a set of items are as a

group. Cronbach's alpha is not a statistical test - it is a coefficient of reliability (or

consistency). The coefficient of cronbach's alpha varies from 0 to 1, and a value of

0.60 or less generally indicates unsatisfactory internal consistency reliability and a

value of cronbach's alpha in the range of .90 to .99 is considered excellent internal

consistency reliability.

Table 3.2

Reliability Statistics

Cronbach’s Alpha Number of Items

.609 29
Source: Field Survey, 2016

Table 3.2 shows the reliability statistics of the variables used in the analysis. The

result of qualitative data shows the cronbach’s alpha value is 0.609 which shows that

60.9 percent of the data taken for the study is valid and reliable.

3.5. Data Collection Procedures and Time Frame

This study is based on both primary and secondary sources of data. The primary

sources of data have been employed to assess the opinion of various respondents with

respect to contribution of commercial banks in the economy of Nepal. The primary

data have been obtained by conducting questionnaire survey with selected employees

of banks. The questionnaire survey was started in 5th September 2016 and completed

40
in 24th October 2016. The secondary sources of data have been employed in order to

investigate the contribution of commercial banks in the economic growth of the

nation. The secondary data are collected from the various government publications,

banks publications and NRB’s publication.

3.5.1. Secondary Data

This study is primarily based on the analysis of secondary data. The data for firm

specific variables have been collected from the financial statement of the sample firms

recorded in the database of the Nepal Rastra Bank provided in their respective

websites. The annual data series on macroeconomic variables such as GDP growth

rate and investment growth of the banking industry are collected from various issues

of “Quarterly Economic Bulletin” published by Nepal Rastra Bank (NRB). The data

relating to nominal GDP and real GDP/Capita will be collected from Statistical Year

Book of Nepal, published by Central Bureau of Statistics (CBS). The secondary data

relating with study are also collected from various official websites journals, website

of related banks, annual reports, economic survey and other published sources like

magazine, newspaper, bulletin, etc.

3.5.2. Primary Data

This study is also based on primary sources of data. The primary sources of data have

been employed to assess the opinion of various respondents with respect to

contribution of commercial banks in the economy of Nepal. The respondents were the

staff of commercial banks due to the nature of the research.

41
3.6. Analysis Plan

The main purpose of data analysis in this study is to explore the relationship between

banking sector and economic growth in the context of Nepal. Besides, the study also

attempts to identify and analyze the trend of commercial banks and economic growth.

Therefore, this section deals with statistical and econometric models used for the

purpose of analysis of secondary data. Secondary data have been collected to analyze

the impact of commercial bank in economic growth. All the observed relationship and

findings have been interpreted to derive the meaningful conclusions.

This section also deals with the analysis of the primary data. The analysis of the

primary data has been made based on the sequence of the questionnaire design. There

are different methods of data analysis that has been used in the study depending upon

the nature and sources of data. Descriptive statistics was used for the primary data

analysis and inferential statistics was used for secondary data analysis. The study used

regression method to analyze whether commercial banks of Nepal have contribution

on the economic growth.

3.6.1. Regression Model

The econometric models employed in this study intend to analyze the relationship

between economic growth and deposits, investment, loan & advances, profitability,

interest earning. For the result and estimation SPSS software has been used. The

multiple regression models can be specified as:

42
Hupothesis 2: The relationship between GDP and deposits, investment, Loan &

advances and interest earning.

GDPt = α + β1t DEPt + β2t INVt + β3t ADVt + β4t INEt + Ut

where, GDP = Real Gross Domestic Product, DEP = Deposits, INV = Investments,

ADV = AdvancesINE = Interest Earning, β1, β2, β3, β4 and β5 = Parameters and Ut =

Error term (it is normally independently identically distributed)

3.7. Statistical Tool for Data Analysis

Collected data were analyzed by using statistical tools, Excel and SPSS software.

After the completion of data collection, all information were gathered, edited, coded

and recorded in Microsoft Excel and SPSS. Data were processed and due

consideration were taken that those data were accurate and consistent with the intent

information obtained. The data are summed up as per the requirement of the

questionnaire using the Microsoft Excel sheet. The collected data are processed with

the use of SPSS Statistical Package. Both primary data and secondary data are

processed and analyze using student friendly computer software that is Excel and

SPSS program.

43
 CHAPTER FOUR

OBSERVATION AND ANALYSIS

The purpose of this chapter is to analyze and interpret the data collected during the

study and present the results of the questionnaire survey. This chapter is divided into

two parts. The first section deals with the presentation and analysis of the secondary

data associated which includes descriptive analysis, correlation analysis and

regression analysis has been used. The second section deals with the presentation and

analysis of the primary data and presents the results of questionnaire survey.

44
4.1. Analysis of Collected Data

This section attempts to analyze and presents the secondary data that have been

obtained from the reports of banks. Different methods have been used for the study

purpose such as descriptive analysis, correlation analysis, regression analysis,

structure, statistical analysis and other inferential analysis. A detail issue of findings

from data analysis has been dealt in the respective sections. This section attempts to

analyze and presents the primary data that have been obtained from the questionnaire

survey conducted among the employee of 8 sampled Nepalese commercial banks.

Questionnaire survey was designed to understand the views of the respondents in

relation to contribution of commercial bank in economic growth of Nepal. A set of

questionnaire including yes/ no types, multiple choices, rankings, and likert scales

type of questions are provided.

4.1.1. Descriptive Statistics of the study Variables

This section deals with the structure of the performing indicators of commercial banks

and economic growth. Structure of commercial banks and economic growth variables

for 15 year has been analyzed. The structure has been shown year wise along with

mean and standard deviation. The results of structure for sample banks are fluctuating.

The structure of dependent variable i.e. Nominal GDP and the independent variables

i.e. deposit, investment, loan and advances, interest earning are shown below.

Table 4.1

45
 Descriptive Statistics of NGDP, Deposit, Investment, Loans & Advances and

Interest Earning

(In Million)

Year NGDP Deposit Investmen Loans & Interest

t Advances Earning
2001 459443 134944 23235 78506.8 19125.4
2002 492231 133456.9 25510.1 78703.6 23196.1
2003 536749 143638.4 32304.9 76368 26167.5
2004 589412 157147.3 32454 89733.9 32106.5
2005 645,084 166934.4 40010.6 10196.7 27392.4
2006 727,827 190624.3 43939.6 105651.1 32873.2
2007 815,658 219857.9 51197.5 123695.2 24560.1
2008 988,272 280682 52256.9 161634.2 23627.1
2009 1,192,774 319237.2 45316.8 171641.2 23621.6
2010 1,366,954 332546.5 45502.6 196177 20716
2011 1,527,344 357016.9 56130.2 241460.9 20271.2
2012 1,695,011 411099.9 68294 260203.6 16401
2013 1,964,540 457520.2 72936.7 310134.2 17005.1
2014 2,120,470 536040.7 84791.8 358198.1 17154.5
2015 2,248,691 655211.2 104581.7 432808.6 15928.8
Mean 17370460 4495957.8 778462.4 2695113.1 340146.5
SD 625113.793 160362.660 22608.892 119660.095 5363.561777
1 9 6
Source: Banking and Financial Statistics, 2016

Table 4.1 shows descriptive statistics of different variables associated with

commercial banks with 15 observations from the period 2001 through 2015.

Therefore, the table indicates the descriptive statistics of the performing indicators of

commercial banks and economic growth variables.

Table 4.1 also indicates the structure of different variables for the period 2005 through

2015. So, the table shows the mean and standard deviation of the variables such as

GDP, deposit, investment, loans & advances and interest earnings. The average value

of NGDP is Rs. 17,370,460 with the standard deviation of Rs. 625,113.79. The mean

value of deposit is Rs. 4,495,957.8 with the standard deviation Rs. 160,362.67 while

46
Rs. 778,462.4 is the mean value of investment with Rs. 22,608.89 standard deviation.

Again, the average value of loans and advances is Rs. 2,695,113.1 with the standard

deviation of Rs. 119,660.95. The mean value of interest earning is Rs. 340,146.5 with

the standard deviation of Rs. 55,363.57.

4.1.2. Correlation Analysis

Nominal GDP has been used as the proxy for the economic growth which is

dependent variable whereas deposit, investment, loan & advances, interest earning are

the explanatory variables used in this study. Therefore, it is reasonable to expect some

kind of statistically significant relationship among these pairs of variables. This

section therefore is devoted to explaining the direction and magnitude of relationship

among different pairs of these variables. The correlation analysis has been performed

for this purpose.

Table 4.2

Correlations
NGDP Deposit
Pearson Correlation 1 .984**
NGDP Sig. (2-tailed) .000
N 15 15
Pearson Correlation .984** 1
Deposit Sig. (2-tailed) .000
N 15 15
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4.2 shows Pearson Coorelations between NGDP and Deposit. Where, the result
shows that there is high level of significant of Deposit in NGDP i.e. 0.984 which is
almost to 1.

4.1.3. Multiple Regression Analysis

47
Multiple Regression analysis is a mathematical measure of the average relationship

between two or more variables in terms of the original units of the data. Regression

clearly indicates the cause and effect relationship between the variables. In regression,

the variable corresponding to cause is taken as independent variable and the variable

corresponding to effect is taken as dependent variable. Regression analysis is the

relationship between dependent variable and independent variable.

Table 4.3

Model Summary
Model R R Square Adjusted R Square Std. Error of the
Estimate
1 .985a .970 .959 127186.68170
a. Predictors: (Constant), Interest_Earnings, Investment, Loan_Advances, Deposit

Table 4.3 shows regression table, summarizes the model performance with relevant

analysis. R represents the multiple correlation coefficient with a range lies between -1

and +1. Since the R value is 0.985, it means placement percentage has a positive

relationship with Deposit, Investment, Loan & Advances and Interest Earnings.

R square represents the coefficient of determination and ranges between 0 and 1.

Since the R square value is 0.970, 97 % of the variation in placement percentage is

enhanced by Deposit, Investment, Loan & Advances and Interest Earnings.

Table 4.4

ANOVAa
Model Sum of Squares Df Mean Square F Sig.
1 Regressi 5308977039796.689 4 1327244259949 82.048 .000b
on .17

48
 Residua 16176452001.4
161764520014.643 10
l 64

Total 5470741559811.332 14

a. Dependent Variable: NGDP

b. Predictors: (Constant), Interest_Earnings, Investment, Loan_Advances, Deposit

Table 4.4 shows ANOVA. F-test has a value of 82.948.

Table 4.5

Result of Coefficientsa
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
(Constant) 166946.640 292939.091 .570 .581
Deposit 3.863 1.543 .991 2.503 .031
1 Investment -3.661 6.391 -.132 -.573 .579
Loan_Advances .535 1.504 .102 .355 .730
Interest_Earnings -3.210 10.379 -.028 -.309 .763
a. Dependent Variable: NGDP

Table 4.5 also indicates the structure of different variables for the period 2005 through

2015. So, the table shows the Coefficients of variables used under observations. The

dependent variable of the observation is Nominal Gross Domestic Product (NGDP)

and independent variables are Deposit, Investment, Loan &Advances and Interest

Earnings. Deposit is 3.863 and t-test shows 2.503 whereas it shows high significance

of the variable Deposit with 0.031 significance level.

However, other variables doesn’t show significant impact on economic growth.

4.1.4. Profile of the Respondents

Table 4.6

49
 Respondents’ profile

Respondents' Character Number Percentage

Gender :
Male 49 65
Female 26 35
Total 75 100.0
Academic Qualification:
Intermediate 10 13
Bachelors 26 35
Masters and above 39 52
Total 75 100.0
Years of experiences:
Below 3 years 23 30
3 to 5 years 18 25
More than 5 years 34 45
Total 75 100.0
Number of Respondents:
Private Banks 53 70
Public Banks 22 30
Total 75 100.0
Source: Field Survey, 2016

The respondents profile along with their personal characteristics and results of the

survey are presented in Table 4.6. It presents the composition of total number of

respondents.

Table 4.6 reveals the personal characteristics of respondents combined on the basis of

gender, academic qualification, years of professional experience and the number of

respondents. Among the 75 respondent 65 percentage of the respondent were male

and 35 percentage of the respondent were female. Out of the total respondents i.e. 75,

there were 13 respondents who completed Intermediate, 35 who completed Bachelors

50
and 52 who completed Masters and above. With respect to the respondents, 30

percent of the respondents have experiences below 3 years, 25 percent of the

respondents have experiences 3 to 5 years whereas 45 percent of the respondents have

experiences more than 5 years. There were 98 respondents from private banks and 22

respondents from public banks.

The profile of the respondents of the questionnaire survey conducted among the bank

employees have been made in this section. The table presented below illustrates the

demographic characteristics of the respondents based on their gender, academic

qualification, years of experiences and number of respondents.

Table 4.7

Responses Associated with Yes/No and No Idea Types of statements

Statement Yes No No

Idea
The role of commercial banks is remarkably enhanced in 64 6 5

Nepal to support the increasing need of the service sector (85) (8) (7)

and the economy.

Development of the commercial banks has become the 49 19 7

basis for measuring the level of economic growth of a (65) (25) (10)

nation.
The role of commercial bank is significant in making 71 1 3

investment for the development of different sectors of the (95) (1.5) (3.5)

economy.
Investment growth is considered to be important variables 60 6 9

in achieving price stability & promoting employment (80) (8) (12)

opportunities & thereby contributing to economic growth.

An increase in deposits will lead to a reduction in the 64 7 4

interest rates prompting investors demand more from the (85) (9) (6)

51
available funds for investments.
Do you think the lending rates provided by the banks are 34 30 11

appropriate? (45) (40) (15)

Do you think that 29 commercial bank is appropriate 17 55 3

number of banks in Nepal? (24) (73.75) (2.25)

Do different types of banking institutions affect growth 45 22 18

differently? (60) (28.3) (11.7)

Do you think the deposit rates provided by the banks are 38 32 5

appropriate? (50) (43.3) (6.7)

Source: Field Survey, 2016

Note: Figure in the Parenthesis Indicates Percentages.

Table 4.7 depicts the response of the respondents where, 85% of the respondents say

that the role of commercial banks is remarkably enhanced in Nepal to support the

increasing need of the service sector and the economy whereas 8% of the respondents

say that the role of commercial banks is not always remarkably enhanced in Nepal to

support the increasing need of the service sector and the economy and 5% of the

respondents say that they have no idea about this.

Again, 65% of the respondents say that development of the commercial banks has

become the basis for measuring the level of economic growth of a nation whereas

25% of the respondents say that development of the commercial banks is not the basis

for measuring the level of economic growth of a nation whereas 10% people say that

they have no idea. 95% people respond that the role of commercial bank is significant

in making investment for the development of different sectors of the economy. 1.5%

respondents say that the role of commercial bank is not significant in making

investment for the development of different sectors of the economy whereas 3.5%

people say that they have no idea.

52
Similarly, 80% people respond that investment growth is considered to be important

variables in achieving price stability & promoting employment opportunities &

thereby contributing to economic growth whereas 8% people respond that investment

growth is not considered to be important variables in achieving price stability &

promoting employment opportunities & thereby contributing to economic growth.

And 12% people say that they have no idea. Further, 85% of the respondents respond

that an increase in deposits will lead to a reduction in the interest rates prompting

investors demand more from the available funds for investments. 9% of the

respondent responds that an increase in deposits will not lead to a reduction in the

interest rates prompting investors demand more from the available funds for

investments whereas 6% people say that they have no idea. 45% of the respondents

think the lending rates provided by the banks are appropriate whereas 40% of the

respondents think the lending rates provided by the banks are not appropriate. And

15% respondents say that they have no idea.

However, 24% of the respondents think that 29 commercial bank is appropriate

number of banks in Nepal whereas 73.75% of the respondents think that 29

commercial bank is not appropriate number of banks in Nepal. And 2,25%

respondents say they have no idea. Similarly, 60% of the respondents think different

types of banking institutions affect growth differently whereas 28.3% of the

respondents think that different types of banking institutions does not affect growth

differently and 11.7% of respondents have no idea. 50% of the respondents think

deposit rates provided by the banks are appropriate whereas 43.3% of the respondents

53
think deposit rates provided by the banks are not appropriate and 6.7% respondents

say they have no idea.

Table 4.8
Responses of employees towards deposit growth and investment growth of their

Commercial Bank

Increasing Decreasing Constant

Frequency % Frequency % Frequency %
Deposit Growth 89 74.2 15 12.5 16 13.3
Investment Growth 91 75.8 15 12.5 14 11.7
Source: Field Survey, 2016

Note: Figure in the Parenthesis Indicates Percentages.

Table 4.8 shows the Responses of employees towards deposit growth and investment

growth of their Commercial Bank in last two decades. The majority of the

respondents i.e. 74.2% response that the deposit growth of their commercial bank is in

increasing trend whereas 12.5% of them say that it is in decreasing trend. 13.3% of

the respondents say that deposit growth is constant. Likewise, the majority of

respondent’s responses towards the investment growth of their commercial banks

where 75.8% of the respondents say that investment growth of their commercial bank

is in increasing trend. However, 12.5% of them say investment growth is in

decreasing trend and 11.7% of them say that it is constant.

Table 4.9

Responses Associated with level of agreement and disagreement on the statements

Statement Disagreement Agreement

54
 1 2 3 4 5
The commercial banks of Nepal play the 7 6 10 16 36

positive role for economic growth. (9.2) (8.3) (14.2) (20.8) (47.5)
Banks deposit has significant impact on 7 6 12 28 22

the economic growth. (10) (7.5) (15.8) (37.5) (29.2)

Increase in interest rates leads to 6 4 11 34 20

increase in deposit level of banks. (7.5) (5) (15) (45) (27.5)

Investment has significant impact on 5 4 10 32 24

GDP. (6.7) (5.8) (13.3) (42.5) (31.7)

Loan and advances has positive 5 4 12 36 18

relationship with economic growth. (6.7) (5.8) (15.8) (47.5) (24.2)

Profitability has significant impact on 7 7 14 33 14

economic development. (9.2) (10) (19.2) (44.2) (17.5)

A commercial bank which has better 7 11 16 31 10

efficiency does not mean that it always (9.2) (15) (20.8) (41.7) (13.3)

will show increase in profitability.

Effective financial intermediation is 8 3 21 30 13

dependent on strong performance in (10.8) (4.2) (28.3) (40.8) (15.8)

mobilizing savings and transferring

these funds to the real sectors.

Interest Earning has significant impact 7 16 21 27 4

on GDP. (9.2) (20.8) (28.3) (36.7) (5)

Investment growth affects real GDP per 8 5 18 32 12

Capita directly. (10) (6.7) (23.3) (43.3) (16.7)

There is positive relation between 8 9 23 27 8

Deposit/GDP and real GDP per Capita. (10) (12.5) (30.8) (36.7) (10)
Investment over deposit is positively 7 9 13 41 5

related to the performance of the (9.2) (11.7) (16.7) (55) (7.5)

banking system.
The performance of banking activities in 4 5 20 36 10

Nepal is reasonable in terms on (5.8) (6.7) (26.7) (47.5) (13.3)

55
operating profit.
Source: Field Survey, 2016

Note: Figure in the Parenthesis Indicates Percentages.

1=Strongly Disagree, 2=Disagree, 3=Neither Disagree Nor Agree, 4=Agree,

5=Strongly Agree

Table 4.9 depicts the response of the respondents where, the majority of the

respondents fall in the agreement region, whereby 47.5% of the respondents strongly

agree and 20.8% agrees that the commercial banks of Nepal play the positive role for

economic growth. 8.3% of the respondents disagree and 9.2% strongly disagree that

the commercial banks of Nepal play the positive role for economic growth whereas

14.2% of them neither disagree nor agree on this statement. Similarly, 66.7% of the

respondents fall in the agreement region, whereby 29.2% of the respondents strongly

agree and 37.5% agree that banks deposit has significant impact on the economic

growth. 10% of the respondents strongly disagree that banks deposit has significant

impact on the economic growth and 7.5% disagree, whereas 15.8% of them neither

disagree nor agree on this statement. Similarly, 72.5% of the respondents fall in the

agreement region, whereby 27.5% of the respondents strongly agree and 45% agree

that increase in interest rates leads to increase in deposit level of banks. 12.5% of the

respondents disagree that increase in interest rates leads to increase in deposit level of

banks, whereas 15% of them neither disagree nor agree on this statement.

Similarly, 31.7% of the respondents strongly agree and 42.5% agree that investment

has significant impact on GDP whereas 12.5% of the respondents disagree with the

statement. 13.3% of the respondents neither disagree nor agree on this statement.

56
24.2% of the respondents strongly agree and 47.5% agree that loan and advances has

positive relationship with economic growth whereas 6.7% of the respondents strongly

disagree and 5.8% of the respondents disagree with the statement. 15.8% of the

respondents neither disagree nor agree on this statement. The majority of the

respondents fall in the agreement region, whereby 17.5% of the respondents strongly

agree and 44.2% agrees that profitability has significant impact on economic

development. 19.2% of the respondents disagree that profitability has significant

impact on economic development whereas 19.2% of them neither disagree nor agree

on this statement. The majority of the i.e. 55% of the respondents agree that a

commercial bank which has better efficiency does not mean that it always will show

increase in profitability whereas 24.2% of the respondents disagree with the

statement. 20.8% of the respondents neither disagree nor agree on this statement.

Similarly, 56.6% of the respondents agree that effective financial intermediation is

dependent on strong performance in mobilizing savings and transferring these funds

to the real sectors whereas 15% of them disagree with this statement. 28.3% of the

respondents neither disagree nor agree on this statement. Similarly, 41.7% of the

respondents agree that interest earning has significant impact on GDP whereas 30% of

them disagree with the statement. 28.3% of the respondents neither disagree nor agree

on this statement.

Similarly, majority of the respondents agree with the statement, 60% of the

respondents agree that investment growth affects real GDP per capita directly whereas

16.7% of them disagree. 23.3% of the respondents neither disagree nor agree on this

statement. 46.7% of the respondents agree that there is positive relation between

57
Deposit/GDP and real GDP per Capita and 22.5% of the respondents disagree

whereas 30.8% of them neither disagree nor agree on this statement. Similarly, 62.5%

of the respondents agree fall in the agreement region, whereby 7.5% of the

respondents strongly agree and 55% agree investment over deposit is positively

related to the performance of the banking system. 20.9% of the respondents disagree

on this statement, whereas 16.7% of them neither disagree nor agree on this statement.

The majority of the respondents i.e. 60.8% fall in the agreement region, whereby

13.3% of the respondents strongly agree, and 47.5% agree that the performance of

banking activities in Nepal is reasonable in terms on operating profit. 12.5% of the

respondents disagree that the performance of banking activities in Nepal is reasonable

in terms on operating profit, whereas 26.7% of them neither disagree nor agree on this

statement.

Table 4.10

Ranking Scores on Performing Indicators of Commercial Banks influencing

Economic Growth of Nepal

Factors Rank Overall Rank

1 2 3 4 5
Deposit 26 21 13 10 5 I
Investment 17 26 11 14 7 II
Loan and Advances 23 14 20 8 10 III
Interest Earning 4 5 13 21 32 IV
Source: Field Survey, 2016

58
Table 4.10 summarizes the ranking scores on performing indicators of commercial

banks influencing economic growth of Nepal. The survey revealed that the response

of the respondents show that performing indicators of commercial bank that influence

the economic growth most is Deposit. The responses of the respondents show that the

second most important performing indicators of commercial bank that influence the

economic growth most is Investment, followed by the third most important

performing indicators i.e. Loan & Advances. The respondents’ responses show that

the fourth important performing indicator of commercial banks influencing economic

growth is Interest Earning. The observed results indicate that the most important

performing indicators of commercial banks influencing economic growth is Deposit.

CHAPTER FIVE

RESULT AND DISCUSSION

This study has employed descriptive research design. The descriptive statistics have

been used to describe the response of respondents related to the study. The descriptive

design used in this study which consists of median, associated with variables under

consideration.

a. The trend and pattern of economic growth and contribution of

Commercial Bank in Nepal.

59
 Table 5.1

Responses Associated with the contribution of commercial banks to the economic

growth of Nepal

Statement Median
The role of commercial banks is remarkably enhanced in Nepal to 1

support the increasing need of the service sector and the economy.
The role of commercial bank is significant in making deposit from 1

the development of different sectors of the economy.

Do different types of banking institutions affect growth differently? 1
Which of the following performing indicators of commercial bank, 2

do you think influences most the economic growth of Nepal?

The commercial banks of Nepal play the positive role for economic 4

growth.
Source: Field Survey, 2016

Table 5.1 depicts the response of the respondents where, the majority of the

respondents say that the role of commercial banks is remarkably enhanced in Nepal to

support the increasing need of the service sector and the economy. Among all the

respondents most of them say that the role of commercial bank is significant in

making Deposit from the development of different sectors of the economy. Likewise,

most of the respondents say that different types of banking institutions affect growth

differently. The median value is 2, means most of the respondents say that investment

is the performing indicators of commercial bank that influences most the economic

growth of Nepal. Lastly, the mode value for the statement “The commercial banks of

Nepal play the positive role for economic growth” is 4 which mean that most of the

people agree with the above statement.

b. Growth trend of banking sector and economic growth of Nepal.

60
 Table 5.2

Response Associated to assess the growth trend of banking sector and economic

growth of Nepal

Statement Median
Development of the commercial banks has become the basis for 1

measuring the level of economic growth of a nation.

Do you think the lending rates provided by the banks are 2

appropriate?
Do you think that 29 commercial banks is appropriate number of 2

banks in Nepal?
What is your view on deposit and investment growth of your 1

commercial bank in last two decade?

What is your view on contribution of your commercial bank in last 1

two decade?
Which of the following macroeconomic factors, do you think 2

influences most of the credit growth in Nepal?

A commercial bank which has better efficiency does not mean that it 4

always will show increase in profitability.

Effective financial intermediation is dependent on strong 4

performance in mobilizing savings and transferring these funds to

the real sectors.

Investment over deposit is positively related to the performance of 4

the banking system.

The performance of banking activities in Nepal is reasonable in 4

terms on operating profit.

Source: Field Survey, 2016

Table 5.2 explains about the result of the median where, most of the people said that

development of the commercial banks has become the basis for measuring the level of

economic growth of a nation. Similarly, majority of the respondents think that the

61
lending rates provided by the banks are not appropriate and also most of the

respondents think that 29 commercial bank is not the appropriate number of banks in

Nepal. The median value is 1 which shows that most of the respondents say that

deposit and investment growth of their commercial bank is increasing in last two

decade. Similarly, the median value is 1 which shows that most of the people say that

contribution of their commercial bank is increasing in last two decade. The median

value is 2 which shows that majority of the people say that Money Supply is the

macroeconomic factor that influences most of the credit growth in Nepal.

c. The relationship between the economic growth and deposits, investment,

loan & advances and interest earning.

Table 5.3

Responses Associated to investigate the relationship between the economic

growth and deposits, investment, advances and interest earning

Statement Median
An increase in deposits will lead to a reduction in the interest rates 1

prompting investors demand more from the available funds for

investments.
Do you think the deposit rates provided by the banks are appropriate? 2
Which of the following factors, do you think influences most of the 2

bank profitability in Nepal?

Which of the following factors, do you think affects most of the 2

interest earnings of bank in Nepal?

Which of the following affects the volume of deposits in commercial 3

bank of Nepal?
Banks deposit has significant impact on the economic growth. 1

62
 Increase in interest rates leads to increase in deposit level of banks. 4
Investment has significant impact on GDP. 4
Loan and advances has positive relationship with economic growth. 4
Interest Earning has significant impact on GDP. 3
Source: Field Survey, 2016

Table 5.3 depicts the response of the respondents where, the most of the people say

that an increase in deposits will lead to a reduction in the interest rates prompting

investors demand more from the available funds for investments. Similarly, majority

of the people think that the deposit rates provided by the banks are not appropriate.

The median value is 2, means most of the people say that loan portfolio is the factor

that influences most of the bank profitability in Nepal. The median value is 2, means

most of the respondents say that changes in the composition of assets is the factors

that affects most of the interest earnings of bank in Nepal. Similarly, the median value

is 1 which show that the confidence of the people on commercial bank of Nepal is the

factor that affects the volume of deposits in commercial bank of Nepal. The statement

was “Banks deposit has significant impact on the economic growth”. The median

value for this statement is 1 which show that majority of the respondents agree with

the statement. Similarly, the median value is 4 which show that most of the people

agree that increase in interest rates leads to increase in deposit level of banks. The

median value is 4 which show that most of the respondents agree that investment has

significant impact on GDP. The median value for the statement “Loan and advances

has positive relationship with economic growth” is 4 which mean that most of the

people agree with the above statement. Lastly, the median value for the statement

“Interest Earning has significant impact on GDP” is 3 which mean that most of the

people neither agree nor disagree with the above statement.

63
In order to address the research question of what are other crucial performing

indicators of commercial bank that have impact on the economic growth of Nepal and

any other comments on development of commercial bank and economic growth of

Nepal, commercial bank’s employees were asked to put their views on the same.

Majority of the respondents have given their views regarding these open-ended

questions and the responses of open-ended questions, are explained as follow:

Majority of the respondents responds that there are several other crucial performing

indicators of commercial bank that have impact on the economic growth of Nepal like

earnings per share, lending rate, spread rate, non performing asset level, increasing the

capital income, prioritized sectorial investment in such as energy sector, deprived

sector, micro sectors, issue of shares, Corporate Social Responsibility fulfillment,

number of commercial banks, asset quality, deposit mobilization etc. Interest Rate,

Deposit level, Guarantee Issue, Quality Credit, level of non-bearing assets, Innovative

Product, Profitability, Remittance transactions, Capital base, number of loan account

and several other services are other crucial performing indicators of commercial

banks that impact on the economic growth of Nepal. The respondents also gave their

views regarding development of commercial bank and economic growth of Nepal.

Commercial banks should focus their lending on productive sectors which helps to

reduce trade deficit of Nepal. NRB should not be traditional in decision making for

lending portfolio and there should be proper implementation of guidelines regarding

investment policies. Commercial banks should focus its lending in agricultural sector

in order to contribute for the economic growth of our country. Basically, the

64
economic growth of Nepal depends on agricultural products so, if banks are eager to

invest on agriculture, then GDP will be increased. Hence, the economy leads to good

economic growth. Investment on productive sector and agriculture sector should be

focused which leads to increasing employment opportunity and rise living standard of

people. Loan Portfolio of the bank in development project is very crucial for

economic growth of Nepal e.g. Hydropower, other infrastructure projects. As per the

government’s plan to help sectors like power, energy, agriculture, tourism will be the

bridge between the development of commercial bank and economic growth.

CHAPTER SIX

SUMMARY, CONCLUSION AND RECOMMENDATION

6.1 Summary

65
Financial Institutions have been regarded to be the core area of economic growth and

development. The commercial bank plays a leading role in the smooth operation of an

economy and it makes available all financial services to individuals and institutions.

Modern commercial banks make the economy always alive and smart to run and

maintain day-to-day commercial, economical and banking transactions. A sound

banking system is important for smooth development of banking system. It can play a

key role in the economy. It is remarkable fact that any country cannot have a

developed economy in the absence of modern banking system. The major objective of

the study is to examine the contribution of commercial banks to the economic growth

of Nepal. The specific objectives of the study includes to examine the trend and

pattern of economic growth and contribution of commercial bank in Nepal, to explore

the relationship between contribution of commercial banks and economic growth of

Nepalese economy. To examine the impact of deposits, investment, loan & advances,

interest earnings growth in GDP, to analyze the total deposit collection and utilization

of commercial banks in Nepal. There has been number of studies conducted by the

different researchers about the banks and economic growth in case of other countries

but only few in the context of Nepal. This paper investigates the contribution or

impact of commercial bank in economic growth of Nepal.

There have been number of studies that have been briefly reviewed related. One of

the studies on financial development and economic growth of Chinese banking sector

by using unit root test and augmented Dickey-Fuller test by Burzynska (2009) found

that there is bidirectional Granger-causality between economic growth and credit

extended by policy banks, operations of rural credit cooperatives and there was

66
unidirectional causality from economic growth to financial development. The study

on the contributions of banking sector in economic growth of Pakistan by Aurangzeb

(2012) found that the deposits, investments, advances, profitability and interest

earnings have significant positive impact on economic growth. In case of Nepal,

Acharya (2012) found that there is existence of co-integration implies that there is

long-run or equilibrium relationship between financial development and economic

growth.

This study relied on the use of both primary data and secondary sources of data. The

secondary data consist of 8 observations from 29 commercial banks of Nepal from the

fiscal year 2000/01 to 2015/16. This study is also based on the primary data generated

through questionnaires and questions set were distributed to the 75 respondent. The

dependent variables used in the study are Nominal Gross Domestic Product whereas

the explanatory variables are the Deposits, Investments, Loans and Advances, Interest

Earnings. This study are based on the primary data and secondary data using

descriptive statistics and regression as research design techniques and data are run on

SPSS. The data collected were verified by checking its reliability and validity through

Cronbach’s Alpha. The method used for the tests are the multiple regression analysis,

Descriptive Statistics, Correlation analysis, ANOVA test and Autocorrelation test.

6.1.1 Major Findings

The study obtained several results and findings about the relationship between the

commercial banks and economic growth. Further, the study also analyzed the

perceptions and opinions of employees regarding the contribution of commercial

67
banks in the economic growth of the Nepal. The major findings of the study have

been summarized below:

 The study showed that there exist positive and significant correlation

coefficient between the dependent variable nominal GDP and explanatory

variable deposit, investment, loan and advances, operating profit and interest

earnings. Among all the variables deposit has the strongest correlation

coefficient with nominal GDP.

 The investment growth rate is not significant at all possibly due to the time lag

of the effect of investment on the economic development. The Growth rate of

GDP and investment over GDP is positive related.

 The findings revealed that almost 98.5 % of the variation in the NGDP is

explained by the regression equation involving explanatory variables deposit,

investment, loan and advances and interest earning.

 Basically, this study investigates the contribution of Commercial Banks in

Nepal’s GDP which ultimately contributes the economic growth of Nepal. The

research shows that there is positive and significant relationship between GDP

and deposit growth of Commercial Banks.

 The study found that the coefficients for first equation where the dependent

variable is NGDP. NGDP is negatively related with investment and interest

earnings is insignificant. Deposit is positively related with the NGDP and is

significant at 5% level of significance. It means when the Deposit increases

NGDP also increases. Loan and advances is positively related and

insignificant.

68
  Likewise, results of the survey revealed that the majority of the respondents

strongly agree that the commercial banks play the positive role for economic

growth of Nepal.

 Similarly, most of the respondents said that development of the commercial

banks has become the basis for measuring the level of economic growth of a

nation.

 The survey result also revealed that most of the respondents agreed that banks

deposit, investment, loan & advances and profitability have significant impact

on the economic growth of nation.

 Likewise, the study indicated that most of the respondents neither agree nor

disagree that interest earning has significant impact on GDP.

 It was also found that most of the respondent agreed that growth in Deposit

affects GDP directly.

6.2. Conclusion

The major conclusion of the study is that nominal GDP is positively correlated with

all the independent variables i.e. deposit, investment, loan and advances, operating

profit and interest earning and have significant impact on nominal GDP. Among all

the explanatory variables deposit plays vital role in the economic growth of Nepal.

The study also concludes from the primary survey that the majority of the respondents

strongly agree that the commercial banks play the positive role for economic growth

of Nepal. It also showed that respondents agreed that effective financial

intermediation is dependent on strong performance in mobilizing savings and

69
transferring these funds to the real sectors. From overall analysis of the study, it can

be concluded that commercial bank can play significant role in the country’s

economic growth, so proper monitoring need to be done on development of

commercial bank.

Commercial banks should focus on building strong trust of general public towards the

banking sector which will ultimately lead towards the economic growth of a country.

Banking access needs to be increased as Nepalese people do not have saving and

deposit habits. Development of commercial banks has supported investors to invest on

their businesses which help on economic growth of Nepal. Merger leads to strong

capital base which ultimately leads to capital accumulation for long term project like

energy sector. It is better to have few big banks then a number of small banks.

Therefore, few commercial banks with strong capital base are must for proper

economic growth. Regulatory bodies should come up with better controlling

measures, paid up capital should be increased for better capital base of commercial

banks lending sectors should not be made compulsory to avoid possible danger etc

can help for development of commercial banks & its development will directly impact

on economic growth of Nepal. Development of commercial bank can play significant

role in the country’s economic growth, so proper monitoring need to be done on

development of commercial bank. Political stability, establishment of industries and

infrastructural development are the basic things to be in place to attain development

of commercial banks & economic growth of the country.

6.3. Recommendation

70
Commercial banks are the backbone of the economic system of the country. The

commercial banks through improvement in their performance help develop to enhance

their well being of financial sector in one hand. On the other hand, it helps in the

economic development of the country. This paper contributes to add value in the

existing literature regarding the impact of banking sector in economic growth

practices by supporting the previous findings and theories. It tries to fill up some gaps

that exist in the area of Nepalese banking. On the basis of the study, there are some

recommendations which are as follows:

 The study revealed that the deposit of the bank is positively related to

economic growth, so the banks should try to increase the volume of deposit

and make strategy to attract and retain deposit in order to achieve the

economic growth of the nation.

 The study result showed that loans and advances of the banks are positively

related with the economic growth. So it is recommended to increase the level

of loans and advances by the banks so as to gain economic growth.

 The study has been conducted on the basis of specific model to explain the
relationship between GDP and contribution of Commercial Banks with the
help of regression analysis. The findings are that the Commercial banks have
positive contribution for the economic growth of Nepal. Therefore, the
research recommends that Commercial Banks should increase the volume of
credit for the economic growth of Nepal.

 It is recommended that the banks should try to increase the interest earnings in

order to achieve economic growth.

 Since there is relationship between investment and GDP, the banks should
increase the level of investment to increase GDP.

71
5.4. Scope for Future Research

This study made preliminary steps in examining the contribution of commercial bank

in economic growth in the context of Nepal. Nepal lacks studies on contribution or

impact of commercial bank in the economic growth of the country. There has been

number of studies about the banks and economic growth in case of other countries but

very few in the context of Nepal. Hence, future studies are needed in order to get

more evidence about the contribution of commercial banks in economic growth of the

nation.

 The future studies can be carried out by selecting other financial institutions

like development bank, finance companies, to grab the more evidence about

the impact of the financial institution in the economic growth of Nepal.

 The performing indicators of commercial banks considered for the study of its

impact in economic growth were limited. So several other variables could be

considered in the future research which are Non Performing Assets Level,

Capital base, Assets Quality, Guarantee Issue, Quality Credit, Innovative

Product, Remittance, Lending rate, Spread rate, etc.

 While assessing the opinion of respondents in relation to impact of

commercial bank in economic growth of Nepal, this study has conducted a

survey mostly among the assistant level employee concentrated in Kathmandu

72
 valley. Further studies are suggested to extend the survey around other places

of the country including all level of employees.

 The sample size and time period taken for the study is limited so further study

can be done by taking large sample size for longer time period. The model

used in this study is limited on regression. Thus other models can be taken to

examine the contribution of commercial banks to the economic growth.

References:

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