Eight Questions About the Relationship Between Finance and Economic Development

This paper explores the linkages between financial development and growth through studies conducted in various countries. These highlight:

• Financial markets anticipate economic growth;
• Financial intermediary development produces faster rates of economic growth and total factor productivity growth.

The paper attempts to explain the relationship between structure of the financial market and economic development. These highlight:

• Relationship based financing is important in developing economy;
• Bank concentration has a depressive effect on industry growth;
• Government bank ownership tends to reduce the growth of financial system.

From the empirical analysis, the author derives that the legal and regulatory system exerts a powerful influence on financial sector development and this component explains economic growth.

Based on the studies, the paper states that although financial and legal systems are significant determinants of the financing of firms, no clear picture emerges on how they affect firms of different sizes.

The paper states that supply leading approach to farm credit was abandoned and microfinance emerged as the new development model.

The author further discuses:

• Objectives of microfinance;
• Differences for the success of some microfinance development projects and the failure of small and medium enterprises and agricultural credit programs;
• Importance of rural investments as a precondition for the effective demand and use of credit.

The paper concludes by stating that finance matters in the economic growth.