Assessing the Nonlinear Impact of Financial Liberalization and Macroeconomic Variables on Banking Productivity: Evidence from Selected Developing Countries

This study examines the effect of financial liberalization and macroeconomic variables (inflation, economic growth, institutional factors, human capital and business environment) on banking productivity in 15 selected developing countries during the period 2006 to 2017 using Markov econometric technique Switching is addressed. The results indicate that the financial liberalization index in first regime (boom period) has a positive effect on number of bank branches, but in second regime (recession period), we see a negative relationship. Inflation and business environment in both regimes have a negative effect on number of bank branches, but economic growth and human capital have a positive effect on number of bank branches. The combined index of institutional factors in first regime has a negative effect on the number of bank branches, but in second regime we see a positive relationship.