Financial Sector Literature Review

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This chapter provides a survey of previous works by different economic and financial researchers regarding financial sector and its impact on economic growth and development of a country. Many theoretical and empirical researches show that in the development of a country financial sector plays an important role.
Robinson (1952), writes “where enterprises leads, finance follows”. This hypothesis follows economic growth and development. In her views economic growth creates demand for financial sector and financial sector respond to these demands automatically. Patrick (1966) causality between financial development and economic growth can either be supply-leading or demand-following. The supply-leading hypothesis
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Keeley and Furlong (1990) have analyzed the effects of financial regulation on risk taking by banks and investigate the factors involve in this.
Rajan (1992) mention the problems of bank-based system, argues that shareholders have a very little information about the bank manager, who controls not only the bank but also the firm through financing and the large banks tend to encourage firms to undertake very conservative investment projects and extract large amount of rent from firms, As a result these firms earn low profit and have less incentive to engage in new and innovative products.
.Stiglitz (1994) support the idea of financial restraints, such as interest rate ceiling on deposit rate, by deepening the profit margins within certain limits, can in fact reduce the problem of moral hazards and adverse selection.
Rajan and Zingales (1996) analyzed the relationship between industry-level growth performance across countries and financial
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The ratio of liquid liabilities (M3) to GDP, ratio of domestic credit provided by the banking sector to GDP and domestic credit to the private sector to GDP were the financial depth indicators used. Using the Granger causality test, the study found a short-run relationship between financial development and economic growth.
Arestis.P (2004) argue that the relationship between financial structure and economic development can be examined on the basis of competing theories of financial structure. According to his research results, market-based financial systems reduce inefficiencies associated with banks and enhance economic development better than bank-based financial system. He also notes that the structure of financial system changes in different stages of economic developm
Hamid et al. (2013) examined the causality between financial development, investment and economic growth in Tunisia for the period 1961-2010. They used a multivariate framework based on Vector Error Correction Model and co integration techniques. Their short run estimates revealed that finance does not lead to economic growth while the long run results showed the opposite conclusion. They also found out that investment was the main engine for economic growth both in the short and long

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