Banking and Financial Institution Development Economics
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Abstract
This study examines how the development of financial institutions—
measured by the Financial Institution Development (FID) Index,
which combines dimensions of depth, access, efficiency, and
stability—influences development outcomes at the district/city level.
Using a quantitative-causal design, we combine stepwise
difference-in-differences (DiD), macroprudential policy event
studies, and spatial panel models to capture inter-regional
mechanisms and spillovers. The unit of analysis is a district/city
panel (2016–2024) linked to indicators for banking, fintech, retail
payments, and regional macro variables. Results show that
increasing FID significantly increases MSME productivity and labor
formalization, accompanied by a decrease in non-performing loans
(NPLs). Event-study estimates show a flat pre-policy period and a
strengthening positive effect 1–3 years post-policy, consistent with
lower transaction costs and improved credit screening.
Heterogeneity analysis reveals an urban–rural gap: urban areas
experience higher elasticity, while rural areas lag behind on riskadjusted
inclusion. Bank-fintech coexistence demonstrates
stronger cost discipline effects in competitive markets, while
Sharia-dominated regions exhibit good inclusion with relatively
manageable risk profiles. The spatial model indicates meaningful
spillovers, underscoring the importance of cross-district
coordination (data interoperability, payment corridors, and a
shared credit registry). These findings suggest a policy agenda:
rural enablement (agents, literacy, shared KYC), bank-fintech data
exchange standards, an adaptive macroprudential framework
based on FID, and cross-authority spatial governance to balance
inclusion, intermediation quality, and system resilience
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