COMCEC Financial Outlook 2018
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developments in the financial markets in this outlook. Data availability and accuracy is very
important to come up with the meaningful analysis in the financial sector. For the OIC countries,
lack of accurate and sufficient data for low income group countries of the OIC is the main
challenge while gathering data.
1.1 Financial Depth
A reasonable level of financial depth is one of the crucial fundamentals for well-functioning
financial markets and institutions in order to reach the desired role of finance in an economy to
lead economic growth and poverty reduction. As the financial institutions and markets are
deepened, financial services have been diversified and sophisticated for financial consumers.
Financial depth captures the size of the financial sector relative to the economy. It is the size of
banks, other financial institutions, and financial markets in a country compared to a measure of
economic output. The most commonly used variable to measure the depth of the markets and
institutions in this regard is private credit relative to the gross domestic product (GDP). The
private credit excludes credit issued to governments, government agencies, and public
enterprises. It also excludes credit issued by central banks. An alternative to private credit to
GDP is total banking assets to GDP, a variable that is also included in the Global Financial
Development Database. It could be accepted as a more comprehensive measure of size, because
it includes not only credit to the private sector, but also credit to government as well as bank
assets other than credit. However, it is available for a smaller number of economies and has been
used less extensively in the literature on financial development.7
In order to measure the depth, private credit by deposit money banks to GDP, deposit money
banks' assets to GDP, stock market capitalization to GDP, and stock market total value traded
are used.
Private credit by deposit money banks refers to the financial resources provided to the
private sector by domestic money banks as a share of GDP. Domestic money banks comprise
commercial banks and other financial institutions that accept transferable deposits, such as
demand deposits.8
Since the role of the private sector in economic growth has been increasing all over the world,
this indicator provides a useful measure on how the financial markets and institutions are used
and affect the economy in terms of size. Recent empirical research has shown that economies
with better-developed banking and credit system tend to grow faster over long periods of time
(Demirgüç-Kunt, Levine 2008) 9. In this regard, domestic credit to the private sector to GDP ratio
is a significant indicator to measure the financial depth of any country.
As shown in the Figure below, OIC average of the private sector credit given by the domestic
banks is lower than the world average. While there has been a slight improvement in recent
years, the size of the private sector credit as a share of the GDP clearly indicates the under
developed nature of the private sector in the OIC countries. OIC average in 2016 reached to
7 World Bank,
8 Private credit by deposit money banks and other financial institutions to GDP, calculated using the following deflation method:
{(0.5)*[Ft/P_et + Ft-1/P_et-1]}/[GDPt/P_at] where F is credit to the private sector, P_e is end-of period CPI, and P_a is average
annual CPI. Raw data are from the electronic version of the IMF’s International Financial Statistics. Private credit by deposit
money banks (IFS line 22d and FOSAOP); GDP in local currency (IFS line NGDP); end-of period CPI (IFS line PCPI); and average
annual CPI is calculated using the monthly CPI values (IFS line PCPI).
9 Benchmarking Financial Systems Around The World 2012, World Bank