Financial Development and Economic Growth in Tanzania: An Empirical Investigation

Abstract

Tanzania economy like of many other emerging market have seen rapid increase number of banks locally and foreign owned since financial sector liberalization in 1990’s even though clear impact of financial sector on economic growth is hard to be singled out. The paper investigates empirically the long run relationship between selected proxies of financial development and economic growth in the Tanzanian context. Using the vector error correction model (VECM), the study finds that financial development is cointegrated with economic growth. That is there is a long run relationship between chosen proxies of financial development and economic growth in the country. This paper used broad money supply M2, foreign direct investment, customer deposits in foreign and domestic banks, credit extended by foreign and domestic banks as percentage of GDP as proxies for financial development. While per capita growth rate used to measure economic growth. The results also show the need to develop even further the financial sector through appropriate regulatory and macroeconomic policies in order to ensure sustainable economic growth as well as economic development. For robustness of the results other test were also performed in this study such as Augmented-Dickey Fuller unit root test and Johansen cointegration test.