The Role of the Banking Sector in Economic Resurgence and Resilience: Evidence from Pacific Island Countries

The Pacific Island Countries (PICs) have long been grappled with their unique economic challenges stemming from their small, dispersed populations, limited resource endowments, and vulnerability to external shocks. The outbreak of COVID-19 further thrust these nations into an unprecedented crisis and left them with the daunting task of economic recovery and resilience building. As these nations strive to rebuild and strengthen their economies, the banking sector can play a pivotal role in economic resurgence and resilience. The extant literature demonstrates the vital role of the banking sector in economic development; however, studies specific to PICs are relatively scant. Hence, a comprehensive study to understand the financial systems and their interaction with economic growth especially after the COVID-19 crisis in the PICs region is imperative. In this context, our study examines the moderating role of the banking sector in economic resurgence and resilience during the COVID-19 pandemic in the PICs region. Our sample consists of five PICs: Papua New Guinea, Fiji, Tonga, Samoa, and Solomon Islands. To avoid the potential endogeneity issues, we employ the system GMM estimation model, and the results indicate that the banking sector plays a substantial role in the economic development of this region. Also, results indicate that the banking sector facilitates the economic resurgence and resilience of PICs through improved performance, which is examined through the growth in loans and deposits, and return on assets. The findings of our study provide insights for financial institutions, policymakers, and researchers into the financial dynamics of the PICs region. © The Author(s) under exclusive licence to Global Institute of Flexible Systems Management 2024.