Bank-based financial development and economic growth in Ghana: an empirical investigation

Abstract

This paper examines the impact of bank-based financial development on economic growth in Ghana during the period from 1970 to 2014. Unlike some previous studies, the current study uses four proxies to measure bank-based financial development. In addition to these proxies, the study uses a composite index of bank-based financial development derived from these four proxies - using the method of means-removed average. Using the ARDL bounds testing approach, the empirical results of this study show that the impact of bank-based financial development on economic growth in Ghana is sensitive to the proxy used to measure bank-based financial development. The results also tend to vary over time. Overall, our results show that when the ratio of domestic credit extension to the private sector by banks to GDP, and the composite index are used as proxies, bank-based financial development has a positive impact on economic growth in Ghana. However, when the ratio of deposit money banks' assets to GDP is used as a proxy, bank-based financial development has a negative impact on economic growth. These results apply irrespective of whether the estimation is done in the short run or in the long run.