Financial sector development and economic growth: evidence from Cameroon

Janice Tieguhong Puatwoe,Serge Mandiefe Piabuo

doi:10.1186/s40854-017-0073-x

Abstract

For decades, African economies have embarked on financial sector reforms. However, the empirical implications of these reforms have been divergent. This paper investigates the impact of financial development on Economic growth using time series data in Cameroon. This investigation was carried out using three common indicators of financial development (broad money, deposit/GDP and domestic credit to private sector). Using the Auto Regressive Distributive Lag (ARDL) technique of estimation, it was discovered that there exist a short-run positive relationship between monetary mass (M2), government expenditure and economic growth, a short run negative relationship between bank deposits, private investment and economic growth equally exists. However in the long run, all indicators of financial development show a positive and significant impact on economic growth. This paper thus confirms the existence of a positive and long-term impact of all the indicators of financial development on economic growth through bound test. It is therefore proposed that the financial reforms in Cameroon should be pushed forward in order to boost the development of the financial sector thus an increase in its role on economic growth.

Highlights

The accumulation of financial assets at a more rapid rate than the accumulation of nonfinancial assets is called financial development according to Shaw (1973)
This is in conformity with the results obtained from the Augmented Dickey Fuller test
The long- run relationship between financial development and economic growth in this study is in collaboration with the works of Mandiefe (2015) which shows that improvement in the financial sector consistently mitigates investment and boosts growth in an economy

Summary

Introduction

The accumulation of financial assets at a more rapid rate than the accumulation of nonfinancial assets is called financial development according to Shaw (1973). According to Levine (2004), financial development occurs when financial instruments, financial markets and financial intermediaries, reduce without necessarily eliminating the costs of obtaining information, the costs of executing contracts and the costs of transaction, as a consequence do a better job by offering financial functions. Economists’ understanding of the nature and relationship which exist between financial systems and economic growth has evolved over time. The role of the financial system on economic development has attracted and received increased attention from both academia and policy makers (Ndikumana 2001), with resulting divergent views emerging. Financial development has played a leading role

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Conclusion