Abstract

In this study, our objective is to find whether high-income countries have a more efficient financial system when compared to middle- and low-income countries. We expect high-income countries to have a better, more efficient financial system when compared to other countries. Our second objective is to find whether high-income OECD countries have a more efficient financial system when compared to high-income non-OECD countries. Most OECD countries are seen as developed nations with a very high Human Development Index, while the same cannot be said for some other high-income countries that are not members of OECD (i.e. Saudi Arabia for example). Do these developed nations have a better, more efficient financial system compared to the other high-income nations that are not classified as developed? We expect to find developed nations to have a better, more efficient financial system when compared to non-OECD countries. We examine eight measures of efficiency. These are “net interest margin”, lending-deposit spread”, non-interest income to total income”, “overhead costs to total assets”, “return on assets”, “cost to income ratio”, “credit to government and state-owned enterprises to GDP”, and “stock market turnover ratio”. When we compare the high-income countries to the “middle-income” and “low-income” countries, we find that with respect to six measures, the high-income countries have better “efficiency” values than the other countries. With regard to “cost to income ratio”, the two groups are not significantly different. Interestingly, with respect to “credit to government and state-owned enterprises to GDP (%)”, we find unexpected results. Contrary to our expectation, we find that, in the high-income countries, financial institutions lend more money to government and state-owned enterprises when compared to the low- and middle-income countries. When we compare the high-income OECD-member countries to the high-income Non-OECD-member countries, we find that with respect to five measures, the high-income OECD countries have better “efficiency” values than the high-income Non-OECD countries. With respect to three measures, the two groups are not significantly different. Overall, our results indicate that although high-income countries generally have a more efficient financial system, in terms of certain measures (i.e. cost to income ratio and credit to government and state-owned enterprises), they are not doing well.

Keywords: efficiency, financial system, OECD, developed countries.

JEL Classification: G10, G20.

Cite as: Kaya, H. D. (2020). The Efficiency of the Financial System: A Comparison of Developed and Less Developed Countries. Financial Markets, Institutions and Risks, 4(2), 16-24. https://doi.org/10.21272/fmir.4(2).16-24.2020.

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