Measuring banking sector development

Conventional measures of banking sector The traditional indicators utilized for assessing the size, depth and development of a country’s banking (financial) sector are: • The ratio of M2 to GDP • The ratio of private credit to GDP. In particular, both these measures have been used to show the causal effects of financial development on economic growth. However, both measures have some limitations: • The ratio of M2 to GDP captures the degree of monetization in the system, but does not capture the degree of bank intermediation. • The ratio of private credit to GDP does not control for non-performing loans and more generally, the quality of credit allocation. • Both measures do not capture the broad access to bank finance by individuals and firms, the quality of bank services and the efficiency of providing banking services. • In general, the quality and availability of indicators on financial stability is limited and the documentation of institutional framework supporting banking lacks robustness.