Relationship Between Financial Development And Economic Growth

The fact that banks control 97% of the world's money supply makes them a vital institution. Banks are the engine of our modern financial system and a source for economic growth. The bank's ability to create credit can have destructive effects; the Great Depression of 1929 and the Great Recession of 2008. In both cases, banks spurred on an asset bubble through overextending credit to aid the purchase of assets. The result was an economic collapse that wiped out wealth and reduced credit creation which stalled productive investments. The lessons of the two great economic collapse support the notion proposed by the author, that bank credit for transactions that do not contribute to the economy should be restricted.

This study tries to examine the relationship between financial development and income inequality by exploring a large cross-country sample for the period 1992-2001. The results show some support for the inequality-narrowing hypothesis. In contrast, the results reject the inequality-widening hypothesis. And the panel data regression provides some weak support for the inverted U-shaped hypothesis.

Financial markets are crucial to promoting greater economic efficiency by channeling funds from people who do not have a productive use for them to those who do. Well functioning financial markets are a key factor in producing high economic growth, and poorly performing financial markets, vice versa. Financial markets and intermediaries have the basic function of getting people together by moving funds from those who have a surplus of funds to those who have a shortage of funds.

Azerbaijan is a small country in Southwest Asia about the equivalent size of Maine. Georgia, Armenia, Russia and Iran border Azerbaijan and are in a vital part geographically that is regarded for natural petroleum resources. Exporting these resources have been increasing lucrative for Azerbaijan’s economy. However, in the past decade there has been an ongoing progression in economic reform to help Azerbaijan come from

The overall development of an economy is a major factor that has significant impacts on the development of the economy's financial markets. Since well-functioning financial systems offer good and easily accessible information, they lower the costs of transaction. This in turn enhances resource allocation and strengthens economic growth. The financial services industry consists of various systems such as stock markets and banking systems that enhance growth and help in poverty reduction. However, commercial banks tend to dominate the financial system during low levels of economic development while stock markets become more active and effective during periods of high levels of economic development ("Financial Sector", n.d.). The other important systems in the financial services industry include sound macroeconomic policies, shareholder protection, and good legal systems.

Banking system and the Financial Institutions play very significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of society. The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system must cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. Rural sector in a country like India can grow only if cheaper credit is available to the farmers for their short and medium term needs.

Banking can be defined as a process through which the finances of a country is controlled and created. These finances are loaned to gain profit through interest. In recent times banks perform varied functions like ATM cards, safeguarding of valuable things, providing lockers, credit cards and online banking. Banks and banking Katy and in other American cities has helped the world economy. The simple method of safeguarding money and lending it to the borrowers leads to a productive flow of money. This process has helped in the development of economies of varied countries.

According to Palley (2007), financialization causes economies to slow their growth and become fragile with a very real potential outcome being recession. When the financial sector has more power, it takes precedence over the real sector. It takes money from the real sector and gives it to the financial sector resulting in huge wage disparities and stagnation in the real sector. The effects on those outside of the financial sector have been great. Household debt to income ratios have increased, as have corporate debt to equity ratios

By identifying the finance-growth nexus in a co-integrating framework through tests of over-identifying restrictions, Luintel and Khan find bi-directional causality between financial development and economic growth in all the sample countries. Christopoulos and Tsionas (2004) also investigate the long-run relationship between financial development and economic growth in a multivariate VAR framework, though the examination is carried out via panel unit root tests and panel co-integration analysis in a panel-based vector error correction model (VECM). For all the developing countries in their sample, Christopoulos and Tsionas find unidirectional causality from financial depth to growth. These two reviewed studies are subject to limitations such that the capital formation is the only additional growth-determining variable incorporated in the framework. Moreover, stock-flow problem inherent in the indicator measurement of financial development is not finely dealt with. Additionally, focusing exclusively on one country instead of a number of nations is advantageous in that the econometric findings can be related to the prevailing institutional structure (Bell & Rousseau, 2001), as Chandavarkar (1992, p. 134) argues that the relationship between finance and growth bmerits

Maurer and Haber (2003) suggest that in the process of financial liberalization and financial deepening, the financing channels for low income people are not have effectively developed, and the difficulties for financing are not have substantial progress. On the contrary, the rich have more capital and convenience to get access into the financial activities and services and get more money.

Financial development boosts economic growth have been shown by the increasing number of scholars, however whether the financial sector development could benefits the income distribution is still controversial. Under this question, this essay try to use statistically method to explore the relationship between income inequality and financial sector development.

In a developing country, such as Egypt, misuse and/or lack of foreign exchange is a main constraint to investment and economic growth, as foreign exchange is necessary to obtain foreign intermediate and capital goods. In addition, lack of foreign exchange results in devaluation of the Egyptian pound, which considered the main cause of inflation in the Egyptian economy.

Mwenda and Mutoti (2009) investigates the effects of market-based financial sector reforms on the competitiveness and efficiency of commercial banks, and economic growth, in Zambia. By using the variables such as Macroeconomic per capita GDP and inflation. Further, by using an

Capital markets or today commonly known as stock markets have played a lesser role in investigating the role of financial development on economic growth since the researchers have always been more oriented to investigate the effect of banks. This can be explained by the fact that stock markets are a relatively new concept compared to banks. In the last three decades availability of data regarding capital markets and increase in theoretical literature suggests that well functioning stock markets can play an important role in economic development has spured research in this field. Trough instruments like diversification of risk, increased liquidity, corporate due diligence, manager control and collection and processing of important

As far as commercial banking is referred, there are two main differences from the traditional approaches (conventional or Islamic), and these are very significant evolutions. One is that this method believes commercial banks as serving providers, rather of like “money lenders” (conventional) or “investing-collaborators” (Islamic). Interest-free banking is inferred as a sub-model; the conventional banking is considered as an “inflation-free” sub-example of the common model. These differences make possible one to wipe out riba from the method without recurring to radical evaluations, and still have an