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Rodgers Musamali Anyanga This study examines the empirical relationship between financial development and economic growth. It presents evidence on a cross section of 50 African countries whose data is available for the period 1980-2008. Two proxies of financial development are employed: the ratio of credit to the private sector to total GDP and the ratio of broad money (M2) to total GDP. Various attempts have been made in the literature to unveil the link between economic growth and financial development. Some studies are in support of the link (Gurley and Shaw, 1967; Shaw, 1973; and Beck et al, 2005) while others oppose the view (Ram, 1999 and Favara, 2003). In view of the controversy in the literature regarding the role of financial development on growth, this study seeks to contribute to the debate by investigating the causal link between financial development and economic growth in Africa.
Using panel estimation technique, it is found that there exist a positive relationship between financial development and economic growth. However, growth of private sector credit seems to impact more on economic growth than the growth of money supply. In addition it is found that there exists a bi-directional relationship between financial sector development and economic growth. The results therefore suggest that both the financial sector and the real sector are important and none can exist in isolation if African countries have to forge ahead. Policy makers should put appropriate measures in place to stimulate and sustain growth of private sector credit in order to experience economic growth. Central banks should stimulate economic growth through the monetary policy but also check on inflation to prevent its adverse effects. In addition Central banks through their general reserve requirements should encourage increase in commercial bank deposits which increases loans and advances vital for stimulating economic growth. Finally development of financial institutions such as the stock and bond firms should be encouraged in order to increase the size of the financial sectors. Through their increased activities, the level of intermediation will increase which will impact positively on economic growth. |
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Last Updated on Wednesday, 23 November 2011 21:47 |
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