ABSTRACT
In emerging markets, the banking institution is the main source of financing for businesses due to its underdeveloped capital market for fund raising. This has made banks the main channel for monetary policy transmission, to affect the overall economic outcome in the country especially during financial crisis. Hence, the collapse of bank institution leads to destruction in the emerging country’s economic performance when it creates detrimental effects on the payment system which paralyze the overall financial system. This includes the impediment to use the banking institutions as an effective tool for monetary policy. This had been documented in various empirical evidences not only from developed markets (Kroszner, Laeven and Klingebiel, 2007; Reinhart and Rogoff, 2009) but also in the emerging markets (Goldstein and Turner, 1996; Lindgren, Garcia and Saal, 1996; Williams and Nguyen, 2005). In addition, the 1997 Asian financial crisis and 2008 global financial crisis proved that the countries’ economic performance was severely affected due to the fragility of bank industry. This further resulted in currency devaluation that leads to crowding the foreign direct investors out from the country and made the domestic firms perform their worst. Thus, stable and sound banking institutions had proven their footing in the domestic market as the main key driver for economic stability.
