CHAPTER I

INTRODUCTION

The banking sector plays a crucial intermediation role by facilitating the flow of
funds between savers and borrowers, thereby promoting economic growth (EG). To
achieve this, banks must attract savings and channel them into loans that finance
productive economic activities. This is essential for rapid EG, as banks can direct funds to
sectors that have the greatest potential for growth. However, it is equally important for
banks to maintain a solvent banking sector to ensure they can provide the necessary funds
to support economic development and growth. A well-developed banking system is
essential for rapid economic growth, as it can absorb internal and external shocks.
Therefore, a stable and sound banking sector is critical for elevating EG.

The relationship between economic growth (EG) and banking industry

development has been a subject of interest among economists and researchers,
particularly since the emergence of endogeneity theories. The development of the
banking industry can be characterized by its ability to provide a wide range of financial
services and products that meet the growing demands of economic activities. Currently,
banking development is considered a significant factor driving EG, although the direction
of causality between these two variables is a topic of ongoing debate in the literature.

According to Pieroni (2009), EG has been considered a crucial objective of

countries throughout the world over the past number of decades and up to date.
However, the development of this process of growth needs certain prerequisites to
satisfy demand. Satisfying this demand may occur by providing sufficient finance for
investment and production activities. These requirements appear heavily in
developing countries where numerous economic problems, such as high inflation and
interest rates, high unemployment rate, very low living and wellbeing standards are
prevalent.

According Rodrik (2000) to these problems, developing countries constantly

seek to maintain their EG to increase their national income, creating more job
opportunities, thus improving living standards. The banking industry is currently
playing a vital contribution to accelerating the process of economic development.

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 Moreover, the banking sector leads to enhance rates of EG in both developing
and developed economies.

Theoretical Framework

Financial Intermediation Theory

According to Chen (June 11, 2024) the theory of financial intermediation

plays a crucial role. Financial intermediation refers to the process by which banks and
other financial institutions facilitate the flow of funds between savers and borrowers,
thereby playing a key role in the allocation of capital in an economy. Studying the
impact of banking sectors on economic growth, the theory of financial intermediation
helps to understand how banks mobilize savings and channel them into productive
investments, which can stimulate economic growth. By examining how banking
sectors intermediate between savers and borrowers, researchers can analyze the
effectiveness of financial institutions in promoting economic development and the
factors that influence this relationship. Overall, the theory of financial intermediation
provides a valuable framework for investigating the role of banking sectors in
economic growth and assessing their impact on the overall macroeconomic
environment.

Conceptual Framework

Figure 1 illustrate the research’s conceptual framework. It is a summary of the

literature on phenomenon. Among the variables presented , banking sector independent
variable. While the dependent economic growth and stability. They have many impact of
banking sectors in economic growth if it is a best way to increase our growth.

Banking Stability Economic Growth

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Statement of the Problem

Despite the importance of the banking sector, there is a dearth of studies on

the impact of banking sector on economic growth and stability. The lack of research
on this topic hinders our understanding of the complex relationships between banking
sector development, economic growth, and stability. This study aims to fill this gap by
investigating the impact of banking sector on economic growth and stability in Mati
City.

Objective of the Study

The objective of this study specifically aims to evaluate the impact of banking
sector on economic growth in Mati City.

a. ) To examine the relationship between banking sector development and economic

growth.

b. ) To investigate the impact of banking sector instability on economic stability.

c.) To identify the factors that affect the performance of banks in Mati City.

Significance of the Study

This study is significant because it contributes to our understanding of the

complex relationships between banking sector development, economic growth, and
stability. The intricate dynamics between these variables are crucial for policymakers to
grasp, as they can have far-reaching implications for the overall health and resilience of
an economy. The findings of this study can inform policy decisions aimed at promoting a
stable and efficient banking system that supports economic growth and stability. By
informing policy decisions in this way, this study has the potential to make a meaningful
contribution to the development of more effective regulatory frameworks, risk
management strategies, and financial inclusion initiatives that support sustainable
economic growth and stability.

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Scope and Limitation

This study focuses on the Mati City banking sector and its impact on
economic growth and stability. The scope of this study is limited to examining the
relationships between banking sector development, economic growth, and stability.

Definition of Terms
For the purpose of this study, the following terms are defined as:

Banking sector development: The growth and expansion of the banking sector in
terms of assets, deposits, and loans.

Economic growth: The increase in the production of goods and services in an

economy over a period of time.

Economic stability: The ability of an economy to withstand internal and external

shocks without experiencing significant disruptions.

CHAPTER II

REVIEW RELATED LITERATURE

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 In theoretical models of growth, investment capital is recognized as the
fundamental factor that determines growth from both perspectives: aggregate supply
and aggregate demand. An increase in the investment capital (total supply) causes
output to increase. An increase in output causes an increase in income and
consumption, that is, an increase in aggregate demand. In turn, an increase in
aggregate demand stimulates investment and promotes growth. Therefore, a lack of
investment capital is often seen as a major obstacle to accelerating economic growth.
Investment capital is also a decisive factor in improving infrastructure and promoting
the application of technological advances. Domestic investment capital is mainly
mobilized from households and entities with idle capital in the economy, which is
then allocated to the business sector for developing investment projects or expanding
business activities. This financial system helps the processes of capital mobilization
and allocation to take place through two main channels: the banking system and the
stock market. Thus, the financial system has a special role in the growth process. The
ability to raise capital and allocate capital depends on the level of development of the
financial system and its components.

According to Levine (2005) The banking system is an integral part of the

financial system. Therefore, the nature of the impact of banking system development
on economic growth can be clarified on the theoretical ground of the concept of
financial development and its role in economic growth. He believes that financial
development is the process by which financial intermediaries, financial markets and
financial instruments perform well in processing information, minimizing transaction
costs, and ensuring the execution of financial transaction contracts so that the
financial system can best perform its functions. He puts forward five important
criteria for financial development. First, economic entities can easily find information
about potential investment projects and allocate capital efficiently. Second, economic
entities can monitor and control investment activities. Third, economic entities can
carry out economic transactions and diversify and manage risks. Fourth, there are
appropriate channels to mobilize savings. Fifth, the financial system supports and
promotes the purchase and sale of goods and services. By performing these functions,
the financial system affects saving and investment, thereby promoting economic
growth. In addition to the definition of financial development by Levine (2005), there
are other definitions of financial development in the literature. Indeed, all of these

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definitions commonly imply financial development in such a sense that the financial
system operates more efficiently and performs its functions well (through the
operation of financial institutions and financial markets), helping economic entities to
access financial resources, invest their savings and satisfy other financial needs as per
their functions and roles.

According to Allen and Gale ( 2001), A banking system that develops,

operates and performs its functions well contributes to the healthy and efficient
operation of the financial system, thereby promoting economic growth. Intuitively,
financial markets and financial institutions can hardly perform their functions if the
banking system is primitive and underdeveloped. For example, if the banking system
does not perform well as an intermediary for payments and money creation, financial
transactions may slow down and financial assets may become illiquid. Similarly,
inappropriate credit decisions and asymmetric information may also adversely affect
the process of capital flow in financial markets. The banking system itself, if well
developed and able to better perform its functions, will directly affect economic
activities and promote economic growth. First, the banking system helps to improve
the allocation of scarce financial resources by providing credit to the most efficient
businesses or investment projects. Second, the banking system assists households in
planning and implementing appropriate consumption through savings and bank
borrowing.

According to Prochniak and Wasiak 2017; Bucci and Marsiglio 2019; Nguyen
and Pham 2021). There are two main views on the nexus between financial
development and growth. The supply-leading view considers financial development to
be the driving force behind economic growth. The demand-following view holds that
financial development results from the real needs of the economy. Based on these two
views, many empirical studies with different datasets and methods have been carried
out in past decades, but they have not yet yielded consensus conclusions about the
direction and channel of interaction between financial development and growth. Many
studies provide evidence that supports the view that financial development plays a
driving role in growth, while others support the view that growth drives the
development of the financial system as the latter develops to respond to the needs of

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the real economy. Meanwhile, a number of studies provide evidence of a two-way
cause–effect relationship. Several recent studies have documented the nonlinear
impact of financial development on economic growth and the important role of
financial stability.

A conclusion drawn from the review of the literature is that empirical studies
provide mixed and inconclusive findings on the interaction between financial
development and economic growth. This could be partly due to differences in the
adopted methods, data samples and time spans. The multidimensionality of financial
development, leading to the use of different measures of financial development, might
be another reason. In addition, the degree and direction of interaction between
financial development and growth might be dependent on country-specific conditions
such as the level of economic development, the degree of financial depth and the
macroeconomic environment. Countries differ in their level of financial development
due to differences in policies and institutions, thus experiencing different interactions
between financial development and economic growth (World Bank 1993).

CHAPTER III
METHODOLOGY
Research Design

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 This study made use of the descriptive research design. According to Gay
(1992: p. 217), descriptive research involves collecting data in order to test
hypotheses or to answer questions concerning the current status of the subject of the
study. A descriptive study determines and reports the way things are. Descriptive
research is scientific research that describes about event, phenomena or fact
systematically dealing with certain area or population.
The nature of this study was generating the impact of banking sector on
economic growth and stability in Mati City.
Sample Size

Sample Total
All bank in Mati City 13
Table 1. Sample size in the Study.

Respondents

Respondents ( Male & Female) Sample

Philippine National Bank ( PNB) 1
BDO Unibank 1
One Network Bank (ONB) 1
Metrobank 1
Land Bank of the Philippine 1
BPI 1
Enterprise Bank 1
EastWest Rural Bank 1
Rural Bank of Mati 1
Card Bank 1
City Savings 1
King Cooperation 1
Total 13
Table 2. The respondents in the study either it is male or female manager in bank.

Data Collection
In this study, the primary tool utilized for data collection will be a survey
questionnaire, with Likert Scale Modality type going from "Strongly Agree (5) to
"Strongly Disagree (1) comprising questions, designed to gauge the impact of banking

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sector on economic grow in Mati City. The questionnaire will be distributed in every
manager of bank either it is male and female. This distribution process will be carried
out via probability. In terms of ethical considerations, prior to the distribution of the
questionnaires, a letter of approval will be presented to t the research adviser, seeking
their consent for the conduction of the survey. Following the collection of the
completed questionnaires, the data will be compiled and subjected to thorough
analysis by the research team. This will facilitate a comprehensive understanding on
the current impact of banking sector on economic growth among the surveyed adults
and guide future initiatives aimed to know if the banking sector help in our economic.

Data Presentation and Analysis

The data which were gathered, collected and tabulated were subjected for
analysis and interpretation using the appropriate statistical tools which is weighted
mean.
Weighted mean involves multiplying each data point in a set by a value which
is determined by some characteristic of whatever contributed to the data point. An
example should help make that rather vague definition clearer. In meta-analysis, a
researcher has a set of effect sizes from a number of studies and wishes to combine
them to find an overall effect size to summarize the general trend. The larger the
sample which was used in a study, the more accurate the effect size found in that
study will be as an estimate of the effect size in the population. Presented with the set
of effect sizes, the researcher could weight each one by the sample size for that study.
In this way, larger studies would be making a greater contribution to the mean effect
size. To do this, one could multiply each effect size by the sample size for that study,
sum each of these results, and then divide the sum by the sum of all the sample sizes.
(Carter, 2010).

For the problem 1, mean was used to determine the impact of banking sector

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Where: WM = weighted

ƒ = frequency

x = ratings

REFERENCES

Allen, Franklin, and Dauglas Gale. 2001. Comparative Financial Systems: A Survey.
Center for Financial Institutions Working Papers, Wharton School Center for
Financial Institutions, University of Pennsylvania. Available
online: https://core.ac.uk/download/pdf/6649943.pdf (accessed on 6 June
2021).

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Almahadin, H. A., Al-Gasaymeh, A., Alrawashdeh, N., & Siam, Y. A. (2021). The
Effect of banking industry development on economic growth: an empirical
study in Jordan. Journal of Asian Finance Economics and Business, 8(5), 325–
334. https://doi.org/10.13106/jafeb.2021.vol8.no5.0325

Chen, J. (2024, June 11). Financial Intermediary: What it means, how it works,
examples. Investopedia.
https://www.investopedia.com/terms/f/financialintermediary.asp#:~:text=A%2
0financial%20intermediary%20is%20an%20entity

Levine, Ross. 2005. Finance and Growth: Theory and Evidence. In Handbook of
Economic Growth. Edited by Philippe Aghion and Steven Durlauf.
Amsterdam: Elsevier, pp. 866–934. [Google Scholar]

Pieroni, L. (2009). Military expenditure and economic growth. Defence and Peace
Economics, 20(4), 327-339. https://doi.org/10.1080/10242690701589876

Prochniak, Mariusz, and Katarzyna Wasiak. 2017. The Impact of the Financial
System on Economic Growth in the Context of the Global Crisis: Empirical
Evidence from the EU and OECD Countries. Empirica 44: 295–337. [Google
Scholar] [CrossRef]

Rodrik, D. (2000). Institutions for high-quality growth: what they are and how to
acquire them. Studies in Comparative International Development, 35(3), 3-
31. https://doi.org/10.1007/BF02699764

World Bank. 1993. The Asian Miracable: Economic Growth and Public Policy. New
York: Oxford University Press. [Google Scholar]

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 APPENDICES

LETTER FOR THE PARTICIPANTS

Dear Sir/ Ma’am,

Greetings!
We, Al Bea M. Macaturac and Rayhana M. Medsi students of Davao Oriental State University,
Guang Guang Brgy. Dahican City of Mati, Davao Oriental, are currently working on a Quantitative
research study in partial fulfilment of the requirements in our subject, Math 15. The title of our study
“ The Impact of Banking Sector on Economic Growth in City of Mati.
Because of this, we would like to ask your permission to be one of our participants since you
have the ability to answer our questions and that you can sustain the information we needed in our
study.

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 Further, if permitted may we ask your most convenient date and time for us to survey. Rest
assured that all your responses and data provided to us will be kept and handled with confidentiality.
Please take note that this survey will include series of questions depending also on the flow of
the survey, and may last at least 1 hour.
If you have any questions regardless of the study, please do not hesitate to contact us through:
09533021797

Thank you!

Truly Yours,

Respondents

AL BEA M. MACTURAC
RAYHANA M. MEDSI _______________________
Researcher

Data Collection Instrument

The type of data collection that we are going to use is primary source. In primary
source there are interview, survey and opinion polls. In terms of ethical considerations,
prior to the distribution of the questionnaires, a letter of approval will be presented to
the research adviser, seeking their consent for the conduction of the survey. Following
the collection of the completed questionnaires, the data will be compiled and
subjected to thorough analysis by the research team. This will facilitate a
comprehensive understanding on the current impact of banking sector on economic
growth among the surveyed adults and guide future initiatives aimed to know if the
banking sector help in our economic.

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15