Financial sector development and economic growth: a theoretical exposition.

Abstract

The various literature and studies reviewed in this exposition have underscored the positive impacts of a developed financial sector on an economy. Whilst a few studies showed that finance follows growth, the majority opinion is that finance leads growth. Unfortunately, growth has not led to economic development in many developing economies, necessitating intervention by such bodies as the United Nations, International Labour Organization and United Nations Development Programme. Economists are equally concerned about this development and have, therefore, conducted studies to show the relationship between economic growth and poverty alleviation. They generally agreed that growth is good for poverty reduction. The objective of this paper is to examine some of the major studies to derive some theoretical basis for the relationship between financial sector development and economic growth. Furthermore, the paper examines some topical issues in financial sector development as well as share thoughts on the seeming aberration that economic growth fails to lead to economic development in many developing economies. The paper is organised in five sections. Following this introduction, major issues in financial sector development are reviewed in Section 2, while Section 3 highlights major studies and findings in respect of the relationship between financial sector development and economic growth. Section 4 reviews some related literature on growth and development. The paper is concluded in section 5.