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CHAPTER 1: INTRODUCTION....................................................................................................1
1.1.
Overview...........................................................................................................................1
1.2.
Problem Statement............................................................................................................1
1.3.
Introduction.......................................................................................................................6
2.2.
Economic Growth.............................................................................................................6
2.3.
Financial Development.....................................................................................................7
2.4.
2.5.
Poverty Reduction...........................................................................................................10
2.6.
2.7.
Research Hypothesis.......................................................................................................11
CHAPTER 3: METHODOLOGY.................................................................................................12
3.1.
3.2.
Sampling Technique........................................................................................................12
3.3.
Sample Size.....................................................................................................................13
3.4.
Statistical Technique.......................................................................................................13
3.5.
Research Model...............................................................................................................13
1.1.
Overview
Poverty in Pakistan has almost always been a major macroeconomic issue and it has
attracted many scholars for their researches. In the recent years, there is a substantial body of
relationship between financial development and poverty reduction is established. And the
literature found is quite conclusive for poverty reduction in improving the banking sector. Some
former studies have given a certain threshold to this argument of economic development, while
others have studied the dynamics of poverty reduction. To study the banking sector development
for poverty reduction, a huge amount of data is used like cross-section data analysis (Yu
Ho&Odhiambo, 2011, p.103).
According to Uddin et al., 2013, p.406), the influence of improvement in finance sector
has ambiguous and uncertain results on poverty reduction in developing countries (Pradhan,
2010, p.114). While comparing poverty reduction with growth model, poverty reduction has
more leverage and significance in economic growth. The standpoint that economic progress can
lead to poverty reduction is not necessary. It implies that the economic growth result in
improving poor lives quality, but it does not.
1.2.
Problem Statement
Although there have been an extensive researches, studies and models that discussed the
impact of banking sector development on poverty reduction, but the results were not certain.
However, the topic needs modifications. The banking sector has been playing a vital role in
encouraging the economic growth which in turn leads to poverty reduction in Pakistan. Poverty
1.3.
of financial sector development. As financial sector development is an effective tool for economy
growth of a country. Many studies have provided that a well-functioning financial system that
allocates resources mobilizes savings and calculates risk management is a contribution to
economic progression. In addition to economic growth, the financial services are more in
demand for the financial advancement.
relationship between economic growth and banking sector development. On the contrary, it is not
argued to that the financial development would have an impact on poverty reduction
(Inoune&Hamori, 2010, p.1).
Poverty reduction, on the contrary, has been the subject of many researchers area of
study. In Pakistan it has been a foremost and a major issue, as Pakistan is also included in the list
third world countries. It has been a serious problem as it affects the global economy as well.
Government of Pakistan has taken some robust initiatives to struggle with poverty and the
officials are concerned about the poverty reduction in Pakistan (Shafiq et al., 2012, p.366). Some
researchers have studied the impact of financial development on poverty reduction by applying
1.4.
research, along with problem statement and significance. This chapter provides general
understanding of the subject, what the research was projected at, what evaluates the need of
research on the issue and how the research can be used as a source in future, etc.
Chapter 2 is a comprehensive review of the former literature and recent research on the
topic. The basic themes, models, theories and issues are discussed here coupled with essential
research findings to shed light on what is already known about the issue and what are the
portions to take up future research and investigation. This chapter also includes the conceptual
framework for the study which strongly emphasizes its base whereas the hypothesis has also
been created supported by literature review.
Chapter 3 is a research methodology i.e. research philosophy, research design, approach,
sampling techniques, type of investigation, data collection and analysis technique, etc. This
chapter moreover comprises the limitations, hypothesis and variables in the study. The chapter
broadens the generalizability of the study by offering a brief review of the research procedure
and by recognizing the limitations.
2.1.
Introduction
The relationship of Banking sector development and poverty reduction in Pakistan has an
extensive and inconclusive empirical and theoretical literature (Uddin et al., 2013, p.305).
Ahamada and Coulibaly (2011) instigated as how financial development is beneficial for
economic growth volatility. The impact of increasing the rate of volatility in emerging economies
is reducing the rate of poverty. Although the augment in economies increases the demand of
financial services but influences the financial growth. Furthermore, a recipient account might
make them reasonable for bank loan and hence it expands the credit market size (Sami, 2013,
p.503). Financial sector is an essential growth aspect and it plays role in the form of fast payment
services, improved remittance services and many other branches in several fields like business
that dwindle transaction cost and goods between household, hence it can help to promote
economic growth (Khan et al., 2011, p.60).
2.2.
Economic Growth
The increase of per capita gross domestic product (GDP) or other measurements of
aggregate income is referred as economic growth. To evaluate economic growth, the rate of
change in real GDP is calculated. Economic growth is only considered to be the production of
goods and services. Economic growth is both; positive and negative. Negative economic growth
is when the economy is shrinking. It is the economic recession or depression (Lewis, 2013, p.23).
Domestic resources are considered to be the significant component for economic growth
and reduce poverty. There are no second thoughts on the role that financial development and
2.3.
Financial Development
Financial sector development established because of an important mechanism as that is
beneficial for economic growth. The financial development has a crucial part to play with in
alleviation of poverty for developing countries like Pakistan (Ellahi, 2011). Financial
development is associated with the financial instability where poor are not benefitted from the
2.4.
skin spreads while pressurizing profits. Alongside healthy transactions and increased non-
Poverty Reduction
Poverty is referred as the capacity to buy the product or services depending on
consumption and income on assets or material possessions. In 1990s poverty reduction and the
poorest have been the purpose of attraction at international summit according to Canadian
International Development Agency (CIDA). Reduction of poverty can be determined in order to
provide credit to businesses of financial intermediaries by creating more jobs through industry
growth (Imran & Khalil, 2012, p.568).
Pakistan has been a developing economy considering the poverty trends based on crosssectional datasets. Poverty dynamics can be classified as chronic poverty and transitory
(Arif&Farooq, 2011, p.1). According to Shafiq et al. (2012), Poverty has been the biggest of
issues in Pakistan. His study is about the relation between poverty alleviation and economic
growth where the time period of 1978 to 2010 was analyzed. His research suggested that there is
a negative impact on poverty but it contributes to poverty reduction in a long-run. There is a
close relationship between finance and growth and that nexus is contributing as an emerging
body that analyses the effects of financial development on both; poverty conditions and income
distribution. A few researches have explored the association between financial growth embedded
in poverty ratio using cross country data and private credit exist for more than 70 developing
countries. The findings resulted in negative association with the poverty ratio after optimizing
the income, inflation rate and the income share of top 10% (Inoue &Hamori, 2010, p.2).
2.6.
between financial development and poverty with the help of government intervention.
2.7.
Research Hypothesis
H2: There is long term equilibrium between banking sector development and poverty
reduction in Pakistan.
3.1.
collection and (2) Secondary Data Collection. The primary data collection method is referred as
the collection of first-hand information which has not been collected before by any researcher or
publications. Some important tools for primary data collection are (a) Interviews, (b) Surveys, (c)
Focus group and (d) Observations. On the other hand, secondary data collection refers to that
information which has already been researched and is known as second hand information. Some
techniques of collecting secondary data collection are through research publications, research
papers, companys annual reports, economic survey reports and newsletters (Galvao et.al, 2013,
p. 307).
The current research has adapted secondary data collection method because of the nature
of the study being conducted. The data will be collected from World Bank and economic survey
website of Pakistan. The basic advantage of secondary data is that it allows the researcher in
collecting meaningful information which can be large thus providing authentic and reliable data
for carrying out the analysis.
3.2.
Sampling Technique
Time series is defined as an arrangement of data points, particularly involving successive
measurement developed through different time intervals. The time series analysis includes
different methods and processes for the purpose of examining time series data to get meaningful
statistical data and other attributes of the data. Moreover, time series forecasting is the utilization
3.3.
Sample Size
The sample collected was from World Bank and Economic survey of Pakistan. Data was
3.4.
Statistical Technique
In a situation where the research variable in long term relation of interest are assumed
stationary, the usual practice is to de-trend the series and then to de-trend the series to a specific
model as autoregressive distributed lag (ARDL) or stationary distributed lag. The regressors may
incorporate lagged values pertaining to dependent variable and lagged and current values of
more than two explanatory variables. The ARDL model enables the researcher in measure the
effect due to the change in policy variable (Ritchie, 2013, p. 36).
3.5.
Research Model
The research model is based on Autoregressive Distributed Lag (ARDL) or Stationary
i 1
i 1
i 1
i 1
Where,
c1 ,c 2
= constant
1 , 2
1, 2
= coefficient on the lagged level of the dependent and independent variable
i
= coefficient on the lagged dependent variable
i
=coefficient on the lagged independent variable
u1 ,u 2
= error term
P = signifies the maximum lag length
4.1. Overview
Chapter four of this study comprises of analysis and findings from secondary data
collected. The data is collected from World Bank and economic survey website of Pakistan. The
researcher has utilized meaningful information for the purpose of research. The study aimed to
understand and evaluate the impact of banking sector development on poverty reduction.
t-Statistic
Prob.*
-0.534955
-3.737853
-2.991878
-2.635542
0.8675
t-Statistic
PAK_PER(-1)
C
-0.038304 0.071603
20.97676 27.01839
-0.534955 0.5980
0.776388 0.4458
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.012841
-0.032030
17.44119
6692.294
-101.6224
0.286177
0.598047
Null Hypothesis:
Prob.
6.649167
17.16841
8.635202
8.733373
8.661247
2.515456
Ho: = 0
(I.e. the needs to be different to make it stationary)
Alternative Hypothesis:
H1: < 0
(I.e. the data is stationary and does not need to be differenced)
From the results of E-views regression analysis, it can be observed that null is coefficient
on PAK_PER (-1) is negative or approximately zero, which mean that there is a unit root.
Alternative hypothesis is less than zero, which means no unit root.
t-Statistic
Prob.*
-6.399386
-3.752946
-2.998064
-2.638752
0.0000
t-Statistic
Prob.
-1.362859 0.212967
9.694089 3.862668
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.661029
0.644887
16.79238
5921.667
-96.47070
40.95214
0.000002
Null Hypothesis:
-6.399386 0.0000
2.509687 0.0203
-0.743043
28.17923
8.562669
8.661408
8.587502
1.909316
Ho: = 0
(I.e. the needs to be different to make it stationary)
Alternative Hypothesis:
H1: < 0
(I.e. the data is stationary and does not need to be differenced)
Hypothesis is tested using the results obtained from E-views regression analysis; it can be
observed that null is coefficient should be zero, which means that there is a unit root. Alternative
hypothesis is less than zero, which means no unit root.
4.5. Interpretation 2
From the above table obtained from E-views, represent the results obtained from
augmented Dickey-Fuller Statistics. To test the hypothesis, level of significance = 0.05 is
considered. Results from Augmented Dickey Fuller Statistics are -6.3993, which is lower than
critical value -2.9980, at 5% level of significance. Therefore, we cannot accept the presence of
unit root, confirmed by approximate p-value for z (t) = 0.000. To reject the null at 10 %,
PAK_BANK
PAK_PER(-1)
0.584032
(0.19862)
[ 2.94041]
0.012276
(0.02320)
[ 0.52924]
PAK_PER(-2)
0.370196
(0.20690)
[ 1.78922]
-0.009493
(0.02416)
[-0.39286]
PAK_BANK(-1)
5.036928
(1.83511)
[ 2.74475]
1.038300
(0.21431)
[ 4.84494]
PAK_BANK(-2)
-2.983277
(1.74801)
[-1.70667]
-0.512719
(0.20413)
[-2.51167]
-24.10537
(37.3688)
[-0.64507]
10.74400
(4.36397)
[ 2.46198]
R-squared
Adj. R-squared
Sum sq. resids
S.E. equation
F-statistic
Log likelihood
Akaike AIC
Schwarz SC
Mean dependent
S.D. dependent
0.924959
0.908283
4172.620
15.22538
55.46732
-92.44485
8.473465
8.720311
383.9813
50.27408
0.607259
0.519983
56.90537
1.778035
6.957925
-43.05338
4.178555
4.425402
25.01565
2.566327
448.8003
-135.4968
12.65190
13.14559
Considering the fact that longer lags were utilized in Dickey-Fuller regression, likelihood
of vector auto regression having longer lags is higher. The results obtained from auto regression
estimates, describes that the coefficients on st1 and f pt1 in both equations are statistically
significant at the 10% level and that the fit for the fp t equation is much better than the fit for the
st equation. Output obtained from E-views for auto regression estimates also mentions the
coefficient standard errors and t-statistics, summary also displays R-squared measures for each
equation (which are valid because each equation estimates are obtained from least square).
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