Banking sector development and economic growth: evidence from Zimbabwe

Abstract

In this study the causality relationship of banking sector development and economic growth in Zimbabwe is investigated. The jagged performance of the Zimbabwean economy presents an interest in unravelling the state of banking development in a stunted economic growth state. Prior to 1991 the Zimbabwean financial sector went through years of financial repression and then after 1991 a raft of financial liberalization strategies were implemented. Around 2004 the financial sector was hit by numerous corporate governance scandals which led to a reintroduction of stricter financial regulations. In the same vein Zimbabwe has experienced a rapid decline in its economic growth in the past two decades. With this background, this study investigated the causal relationship between banking sector development and economic growth by testing for Granger causality based on a vector error correction model. The proxies used for banking development sector are real broad money (M2) to real GDP ratio denoted by YM2 and the real domestic credit to real GDP ratio represented by YCRED. More so, the proxies used for economic growth are absolute values of real gross domestic product (RGDP), real domestic credit (RCRED) and real broad money (RM2) as proxies for financial intermediary development as well. The study established a long-run relationship between economic growth and banking sector development. Therefore, economic growth spurs banking sector development in Zimbabwe. This is consistent with the “demand following” finance-growth hypothesis.