Research Paper | Economics | Rwanda | Volume 8 Issue 2, February 2019
Effects of Financial Sector Development on Economic Growth in Rwanda
Jacques Ntezimana, Dr. Patrick Mulyungi
This paper aims to study the big picture on the effects of financial sector development on economic growth in Rwanda. As most of recent empirical studies on finance-growth across the world including Rwanda, they used Engle Granger cointegration techniques to test the existence of relationship between the financial sector development and economic growth. However, these tests have low power to reject the hypothesis of no cointegration for short sample and / or when a structural breaks is ignored even though their estimation samples spanned relatively long periods. To avoid possible parameter bias associated with previous works; this paper examined the effects of proxies of financial sector development on economic growth in Rwanda using the Gregory and Hansen (1996) cointegration test that accounted for structural breaks. The method was applied to Rwanda quarterly data spanning 2000 to 2015 period obtained from National Bank of Rwanda, while the Fully Modified Ordinary Least Square procedure was employed to estimate the model coefficients. Four alternative indicators captured financial sector development: money supply as ratio of RGDP, credit to private sector as ratio of RGDP, bank deposit liability as ratio of RGDP; and interest rate margin while the economic growth was measured by RGDP. The study found empirical support for a significant structural break occurring at 2013q1 of the cointegrating relationship between real gross domestic product and the selected determinants of financial sector development. The study revealed that the financial sector holds a great potential for promoting economic growth in Rwanda. Specifically, the results show that credit to private sector and bank deposit liabilities have positive and statistically significant effects on RGDP while the money supply has shown significant negative effect on the growth. The study recommends therefore the government of Rwanda to reinforce the existing policies that will encourage the public to save more money to allow the bank to have more liquidities to loan out and invest. We also recommend the government of Rwanda to reduce the constraints to access to finance for private sector that hinder them from expanding their businesses hence stimulate the economic growth.
Keywords: Proxies of financial sector development, economic growth, cointegration with structural break
Edition: Volume 8 Issue 2, February 2019
Pages: 1850 - 1855
How to Cite this Article?
Jacques Ntezimana, Dr. Patrick Mulyungi, "Effects of Financial Sector Development on Economic Growth in Rwanda", International Journal of Science and Research (IJSR), https://www.ijsr.net/search_index_results_paperid.php?id=ART20192113, Volume 8 Issue 2, February 2019, 1850 - 1855
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