Financial development in economic growth

CURRENTLY, 57 scheduled banks and six non-scheduled banks operate under full control and supervision of the Bangladesh Bank. A study was undertaken to find out the relationship and impact of financial development on economic growth in Bangladesh. The Finance-led growth/supply model was used to identify the relationship. The proposed time series was from 1990-2015. The Johansen Co-integration test confirmed a long-run relationship between economic growth and export growth, economic growth and total credit from banks and financial institutions.

The conclusion was that there remained a co-integration between economic growth and financial growth in the long run. However, in the short-run, using granger causality test it was found that no relationship existed between economic growth and finance. Interestingly, it was found that the growth of economy caused increased investment of financial institutions to the public sector. It is also found that direct investment by the financial system has significant impact on economic growth. Interestingly another finding from the research was that the economic growth causes inflation to rise in the short run.

Export growth has significant bi-directional relationship with economic growth in the short run but in the long run, it is GDP growth which explains export growth. In the long run, we can also expect that total domestic credit and economic growth both depend on each other since there is a bi-directional relationship. In other words, growth explains higher domestic credit and domestic credit growth explains GDP growth.

Moreover, the investment in the private sector by financial system can also be explained by economic growth in the long run, which suggests if Bangladesh economy grows higher, the private loans by banks and NBFIs will be impacted significantly. In other words, bankers will be more affected by GDP growth while providing private sector loans. Therefore, our final findings supported the relationship between economic growth and financial development and there is little or no relationship between finance and growth from the perspective of Bangladesh in the long run.

Muhammad Bodruddoza

MBA, BBA, Department of Finance

University of Dhaka

[email protected]