The Impact of Government Ownership of Banks, Foreign Capital Inflows and Institutions on Financial Development

This thesis consists of three empirical and one theoretical essays on three determinants of financial development (FD) namely government ownership of banks, foreign capital inflows (FCI) and institutional quality. Some research has concluded that government ownership of banks negatively affects their soundness. Bretton Wood institutions have used these conclusions to advocate for state-owned banks privatization. The first essay shows that this research was weak in the way it controlled for fundamental determinants of soundness of banks, and lacked rigorous econometric analysis. With data covering 2001-2011, we show that if there is any relationship between government ownership of banks and their subsequent soundness, it is positive. These results are robust to various measures of FD, institutional quality and econometric approaches. The second essay presents a theoretical model predicting a negative relationship between Official Development Assistance (ODA) and FD when political institutions are weak. The third essay empirically investigates the hypothesis that the effects of ODA on FD are influenced by the level of democracy in recipient countries. Using a panel data for 37 developing countries covering 1980-2005, we apply different econometric approaches (pooled OLS, IV2SLS, fixed effects and dynamic GMM) to show that while ODA is harmful to FD in autocracies it could be effective in democracies. These results are robust to various measures of FD and democracy. The fourth essay is an empirical investigation of the hypothesis that different types of FCIs have different impacts on credit availability in developing countries. Using 5-year average data for 53 developing countries covering 1990-2013 and disaggregating FCIs into their main five types, we apply OLS, fixed effects, and dynamic GMM to show that there is a positive and statistically significant relationship between FDI, debt and equity and private credit while remittances and ODA are not significant determinants of private credit in developing countries.