The impact of financial development on economic growth in Zambia

Abstract

This study examines the impact of financial development on economic growth process for the period 1964 to 1998. The study explores financial developments in Zambia and the channels of influence by which financial development is related to growth. The study also looks at which financial ntermediaries are doing the intermediation and to whom the financial system is allocating credit. Chapter 2 describes discusses the political and economic developments the evolved after independence, Policy reforms and implications and the features of the banking industry as well as the non-bank financial intermediaries in Zambia. Chapter 3 discusses theoretical and empirical literature for the purpose of highlighting existing body of knowledge on this topic. Chapter 4 estimates an error correction model of financial development indicators to investigate the channel through which the allocation of a higher proportion of assets to the non-financial private sector by the financial intermediaries affects economic growth in Zambia. Chapter 5 gives policy implications and recommendations. The main findings of this study are that the development of a financial system has an indirect effect on economic growth. Specifically, the size of the financial system is not statistically significantly related to economic growth through the direct channel (per capita income) while the relationship is negative and remains weak through the indirect (investment) part. The fraction of credit allocated to the private sector by financial intermediaries has no direct relationship with economic growth. Moreover, the measure of assets distributed to the private sector has an indirect effect on economic growth.