Does bank profitability affect economic growth: Examples of banks in some western Balkan countries

Abstract

Banks play an important role in a country's economy because increasing savings and capital accumulation has a positive effect on economic growth and employment through the banks' resource transfer function. The purpose of this study is to establish a cause-and-effect relationship between bank profitability and economic growth in three selected countries, including Bosnia and Herzegovina, Serbia, and Croatia. In this research, a panel causality test is applied to examine the cause-and-effect relationship for the time period from the first quarter of 2008 to the fourth quarter of 2020. Empirical findings in this study showed that the profitability of banks in selected developing countries (Bosnia and Herzegovina, Serbia and Croatia) has a positive effect on economic growth. Also, this research provides insight into in-depth analysis in terms of considering several countries through the use of a panel causality test, for the purpose of studying the relationship between bank profitability and economic growth.