The Impact of Financial Sector Development on Economic Growth: The Case of Ethiopia

Abstract

Finance-growth nexus is one of the main debatable issues in the major economies of the world. Some argue that the impact goes from finance to growth while others argue that the impact is reverse, i.e. economic growth lead financial sector development. There are also others who suggest the relation is bi-directional. So, this study focused on examining the impact of financial sector development on economic growth of Ethiopia by using annual data for the period 1980-2013.The study used time series econometrics model which was estimated by using Ordinary Least Square (OLS). In this study financial sector development was proxied by credit extended to private sector to GDP ratio. The finding of this study suggests that financial sector development has positive impact on economic growth of Ethiopia. Hence, to increase the positive contribution of the sector on the economic growth of the country priority should be given in creating favorable institutional environments, internal capacity building and ensuring accessibility to the rural population.