The role and realities of bank operations in the economic growth of Malaysia

Although a number of studies have been undertaken to demonstrate the importance of financial institutions to economic growth (for example: Gurley and Shaw 1955, Patrick 1966, Porter 1966, Goldsmith 1969, Maldonado 1970, Mckinnon 1973, Shaw 1973), only a few studies (such as: Bhatia and Khatkhate 1975, Abdi 1977) have dealt exclusively with developing countries. Even more rare are in-depth empirical studies of the contribution of the financial sector to the real sector in developing countries. In an attempt to fill this gap in the literature on finance and development, an empirical study on the role and realities of bank operations in the economic growth of Malaysia was undertaken. Malaysia was selected since it is one of the few developing countries to achieve rapid economic growth and it was interesting to explore the impact of banks on such a growth. In short, the primary objective of the study was to demonstrate the significance of finance (banks) to economic growth in Malaysia. To accomplish this objective the following analyses were undertaken: (i) examination of the relationship between functions and operations of banks and on the other hand, and the growth of the financial and real assets of the country on the other (on a macro-level); (ii) collection of information on the impact of banks, as perceived by the public (on a micro-level via surveys, interviews and case studies); (iii) an investigation of the effects of the growth in banking on the informal credit market (moneylenders, pawnbrokers, tontine operators - through interviews). The findings generally indicated that the banks have been essential to the economic growth of Malaysia. Although the econometric analysis failed to conclusively link finance to economic growth, the micro-level analysis pointed to the important contribution that banks made to the business sector. The surveys, interviews and case studies brought out the realities of bank operations in Malaysia. Relevant recommendations were made as a consequence of these original and significant findings. The recommendations should be useful while formulating policies to enhance the contribution of banks to economic growth in Malaysia.