Does bank-based financial development spur economic growth? Empirical evidence from the Democratic Republic of Congo (DRC)

Abstract

In this study, we examined the dynamic causality between financial development and economic growth in the Democratic Republic of the Congo (DRC), using time-series data from 1965 to 2015. Unlike some previous studies, the current study used three proxies to examine this linkage. These are liquid liabilities as a percentage of GDP (FD1), deposit money bank assets as a percentage of GDP (FD2), and bank deposits as a percentage of GDP (FD3). In addition, the study used savings and inflation as intermittent variables, thereby creating a multivariate Granger-causality model, and limiting the omission-of-variable bias, which has been found in some previous studies. Using the ARDL bounds testing approach, the study found that there is a short-run causal relationship between financial development and economic growth in the DRC, but the direction of causality is dependent on the proxy used to measure the level of financial development. When financial development was proxied by liquid liabilities as a percentage of GDP, unidirectional Granger-causality was found to prevail in the short run, running from economic growth to financial development. However, when deposit money bank assets as a percentage of GDP and bank deposits as a percentage of GDP were used as proxies, causality between financial development and economic growth was found to be bidirectional, but only in the short run. The study recommends that policy efforts in the DRC should be directed at developing both the financial sector and the real sector in the short run as both sectors have been found to be mutually beneficial to each other in the main, in this study.