The Role of Information Communication Technology on Financial Development

Although there is well-developed literature on the determinants of financial development, previous studies have neglected the role of Information Communication Technology (ICT). To fill this gap; this research aims to test whether ICT can be considered as a possible determinant of financial development using an annual time series data for Germany that covers the 1990-2016 period. Individuals using the internet (% of the population) and domestic credit to the private sector were used as proxies for ICT and financial development. To refrain from omitted variable bias, gross domestic product (GDP) per capita, foreign direct investment (FDI), and stock market capitalization were included in the empirical model as control variables. To investigate the statistical properties of the variables and the relationship among them, the following tests were employed: the ADF and PP unit root tests, the Johansen-Juselius co-integration test, the canonical co-integrating regression test, and the Granger causality test. Obtained empirical findings showed that ICT has a significant positive impact on financial development. Financial development is also positively and significantly affected by GDP per capita, FDI, and stock market capitalization. Moreover, the Granger causality test revealed that ICT and stock market capitalization Granger causes financial development. Obtained empirical findings imply several policy implications for Germany to improve its financial development further. To fund neglected start-up ICT firms, increase tax incentives to motivate research and development on ICT, and strengthen ICT infrastructure will help to improve the ICT, which will, in return; stimulate financial development. Germany should also further enhance its labor skills to benefit from the impact of ICT on financial development. Economic growth, FDI, and stock market capitalization should be considered to develop the financial sector as well. Policies regarding these factors are discussed in the conclusion section in detail. Keywords: Information communication technology; Financial development; Stock market capitalization; Foreign direct investment; Economic growth; Time series analysis; Germany.