The document discusses the positive relationship between the growth of the financial sector and economic development, highlighting that financial institutions facilitate vital services such as loans and investments that stimulate economic growth. It emphasizes that while a strong financial sector is crucial for economic growth, it must be supported by strong institutions and effective investment policies, especially in developing economies facing issues of information asymmetry. Lastly, it acknowledges that financial development positively influences economic growth through capital productivity and savings accumulation, although the direction of causality remains complex and not fully understood.

1. THE GROWTH OF THE FINANCIAL SECTOR HAS A POSITIVE IMPACT ON THE ECONOMIC
DEVELOPMENT OF A COUNTRY.
FINANCIAL
INSTITUTIONS
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2. DEFITION OF TERMS
• Jurek (2014) defines financial institutions (FIs) as those firms engaged in the business of dealing
with financial and monetary transactions such as deposits, loans, investments and currency
exchange.
• The financial sector is a section of the economy made up of firms and institutions that provide
financial services to commercial and retail customers. This sector comprises a broad range of
industries including banks, investment companies, insurance companies, and real estate firms
(Aizenman, Pinto & Sushko, 2013).
• Economic development is the process by which a nation improves the economic, political, and
social well-being of its people.
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3. DEFINITION OF TEMS (CONT..)
• Whereas economic development is a policy intervention endeavor with aims of improving the
economic and social well-being of people, economic growth is a phenomenon of market
productivity and rise in GDP.
• Consequently, as economist Amartya Sen points out, "economic growth is one aspect of the
process of economic development“
• Indicators of economic development: BNP per capita; Population Growth; Occupational Structure
of the Labor Force; Urbanization.; Consumption per capita; Infrastructure; Social Conditions;
literacy rate; life expectancy; health care; caloric intake; infant mortality etc
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4. FINANCIAL SECTOR & ECONOMIC
DEVELOPMENT
• Development of insurance and banking institutions is one of the crucial elements that plays an
important role in stimulating financial development and thereby the growth of the economy (e.g.,
Patrick 1966, Sandberg, 1978; Levine, 1997).
• Asserting the importance of financial intermediaries, Schumpeter (1911) argued that the services
provided by them are crucial for economic development.
• Analyzing the same relationship for 10 developing countries Christopoulos and Tsionas (2004),
find causal relationship from financial development to economic growth in the long run.
• A strong financial sector includes banks, investment companies, insurance companies, and real
estate firms, and these are central in promoting economic growth through provision of resources
for industrial exapansion.
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5. FINANCIAL SECTOR & ECONOMIC
DEVELOPMENT
• Researchers have suggested that the relationship between financial development and economic
growth depends on the level of economic development in the country.
• For example, Liang and Reichert (2006) find that the causality between financial development and
economic growth changes with the change in economic growth cycle.
• At some level it is “demand following” while at some other level it is “supply led.”
• For the developing countries the causality shows “demand following” relationship while such results
for the developed countries were found to be weak.
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6. FINANCIAL SECTOR & ECONOMIC
DEVELOPMENT
• he empirical study by Arena (2008) finds that economic growth is positively and significantly affected
by insurance activity.
• The findings show that life insurance has a significant effect on economic growth only on high
income countries.
• Haiss and Sumegi (2008) also find positive impact of life insurance on economic growth of
European Region countries that include Switzerland, Norway and Iceland.
• Similar results are also found by Curak et al. (2009) where using the data of 10 transition EU
countries, they have found that economic growth is promoted by development in the insurance
sector
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7. FINANCIAL SECTOR & ECONOMIC
DEVELOPMENT
• The impact of financial sector in economic growth is considered vital for the economies as the
financial sector or intermediaries play an important role in mobilizing the funds “to the highest-
valued users in the economy” (Greenwood, 2013).
• According to Levin (2004) in Zhuang et.al., (2009) the countries with well developed financial
sector services tend to grow faster as they can invest more and thus reap more.
• a financial system that is well-developed stimulates growth by channeling savings to the most
productive investment projects.
• Conversely, financial repression results in poorly functioning financial system that in turn
depresses growth.
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8. THE ROLE OF THE FIANCIAL SECTOR IN
ECONOMIC GROWTH
• The promotion of development needs a sufficient amount of capital stock and profitable investment
that guarantees a sustainable growth in the economy – thus, growth in the financial sector is a
prerequisite of economic development.
• A stable financial sector enables savings, and the necessity of savings for economic growth is linked
with their effectiveness in financing capital accumulation and therefore increasing investments
(Pagano, 1993).
• Ideally, the banking sector develops to serve as an efficient intermediary between depositors and
investors, generating market-clearing prices and interests rates, and these are indispensable in
economic growth through revenue accumulation.
• According to Bencivenga and Smith (1991) the beneficial activities of banks are accepting deposits,
lending thus eliminating the need for self financing.
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9. THE ROLE OF THE FIANCIAL SECTOR IN
ECONOMIC GROWTH
• Banking sector development can also be measured by the margin between lending and deposit
interest rates and by the percentage of non-performing loans in the economy.
• This is because both are significantly and negatively related to economic growth as non-performing
loans describe the quantity and quality of information that the banking sector has collected and
analyzed which in turn affects its lending to investors.
• The World Bank (2001) cited empirical studies, which strongly suggested that improvements in
financial arrangements precede and contribute to economic performance.
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10. THE ROLE OF THE FIANCIAL SECTOR IN
ECONOMIC GROWTH
• The financial system is also particularly important in reallocating capital and thus providing the
basis for the continuous restructuring of the economy that is needed to support growth.
• Looking back more than one century ago, during the Industrial Revolution, it’s observable that
England's financial sector did a better job in identifying and funding profitable ventures than other
countries in the mid-1800s. This helped England enjoy comparatively greater economic success.
• he banker and former editor of “The Economist” Walter Bagehot expressed this in 1873 as follows.
‘In England, however, ... capital runs as surely and instantly where it is most wanted, and where
there is most to be made of it, as water runs to find its level.”
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11. THE ROLE OF THE FIANCIAL SECTOR IN
ECONOMIC GROWTH
• Bank-based finance has a special role to play for many companies in need of funds, and thus helps
to ensure a well-balanced growth process.
• Banks can contribute to alleviating the impact of sudden economic shocks on their clients.
• Banks stand ready to provide many customers with funds even in adverse circumstances, e.g.
when the liquidity of financial markets dries up.
• However, if the financial sector is not developed enough, lending becomes compromised hence
increases the risk of financial shocks on many firms. Thus disrupting the positive developmental
trajectory of a country.
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12. THE ROLE OF THE FIANCIAL SECTOR IN
ECONOMIC GROWTH
• Also the design of prudential regulation plays an important role from a growth perspective.
• Supervision is the guardian of financial stability, which in turn crucially determines the capability of
the financial system to allocate resources efficiently and absorb liquidity shocks.
• The collapse of the Zimbabwean financial sector in 2008 led to a failed economy as all forms of
trade came to a standstill.
• Also, a weak financial sector in Zimbabwe led to the “disappearance” of 15 billion. Such porous
and leaking financial sectors are a liability to the economic development of a country.
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13. THE ROLE OF THE FIANCIAL SECTOR IN
ECONOMIC GROWTH
• A developed financial sector allows money exchange which leads to accumulation of foreign
currency through remittance inflows and these contribute immensely to economic development.
• Remittances made up between 11-15% of Zimbabwe’s GDP in 2011. such figure as R6.8 Billion
(about US$847 million) is a significant input into the economy.
• Remittance inflows started to increase around 2008 when the financial sector made significant
improvements which Mukuru, Ecocash Diaspora, and World Remit coming into play.
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14. THE ROLE OF THE FIANCIAL SECTOR IN
ECONOMIC GROWTH
• Financial sector development may be an essential prerequisite for economic growth, since well-
functioning markets and financial institutions may reduce the transaction costs and asymmetric
information problems.
• At the same time, financial institutions play an increasingly pivotal role in identifying investment
opportunities, selecting the most profitable projects, mobilizing savings, facilitating trading and the
diversification of risk, as well as improving corporate governance mechanisms.
• An efficient financial sector positively affect economic growth through the efficient allocation of
resources to the most productive users.
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15. COUNTER ARGUMENT
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16. DEPENDENCIES
• A strong financial sector alone is not sufficient to drive economic growth.
• Strong institutions and effective investment policies are equally indispensable in driving
economic growth.
• Borrowing constraints and growth will ultimately depend on the importance of the effect of
borrowing constraints on the marginal productivity of capital relative to their effect on the
volume of savings.
• It could be argued that the roles of banks in economic growth of countries are limited especially
in developing economies where imperfect information exists.
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17. DEPENDENCIES
• It could be argued that the roles of banks in economic growth of countries are limited especially in
developing economies where imperfect information exists.
• The paradigm of asymmetric information between borrowers and lenders offers valuable insights
into the forms that finance is likely to take; as it will determine who will be able to obtain finance,
from whom and under what terms and conditions.
• This process will severely limit access to funds for those who need it and thus slow the rate of
economic activities.
• Thus, banks engage in credit rationing to compensate for this risk by imposing higher prices on
borrowers which discourages borrowers with worthwhile investments from seeking loans, thereby
worsens the rate economic activities in the country.
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18. DEPENDENCIES
• In effect the role of banks in economic growth is severely limited as credit rationing
discourages a pool of borrowers which undermines the markets.
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19. CONCLUSION
• To come to a general empirical conclusion, we can say that studies using cross sectional
regressions found out that financial developments positively affect economic growth
through productivity of capital and accumulation of saving, though they however failed in
explaining the real direction of causality between financial development and economic
growth.
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20. THANK YOU
SIYABONGA
THE END
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