An analysis of the role of bank financing in the evolution of emerging economies : a case study of the BRICS countries

Abstract

Objective: The aim of this study was to identify the effects of bank financing on BRICS economic performance. It aimed to analyse the behaviour of main variables, such as bank financing, currency exchange movements and GDP growth rates, and the relationship between each other during the past decade. The target was to find the extent of the importance of bank financing to emerging economies, the use of such source of financing by both the private and public sector and the effects of availability of financing in the appropriate currency on an economy’s performance. Approach: Data was obtained from online sources such as BRICS central bank websites, development banks, the World Bank and the International Monetary Fund. Data from these sources was analysed against each other to identify any relationships between them. A qualitative approach was taken to be able to analyse the findings more in-depth. Results: The study found that bank financing within BRICS is increasing irrespective of the economic cycle. Bank financing had increased in all areas studied, being financing utilised by public and private sectors as well as financing provided by privately-owned, central and development banks. Also the amount of bank financing in general increased both from domestic sources and also from foreign sources. It was found that the currency denomination can play a crucial role in the effectiveness of financing during investment, especially at times where the domestic currency experiences adverse effects against the currencies in which the loans are denominated. Conclusion: Bank financing is one variable within the economy’s system, since there are various other factors which affect an economy’s performance. However, the right financing coupled with the appropriate policies would stimulate economic growth. This has been identified by governments who have recently set up new development banks to create a fresh source of finance. Similarly, privately-owned banks should facilitate financing required for investment purposes to domestic firms and entrepreneurs.