Financial Intermediation and Economic Growth: Evidence from East Africa

Abstract

This paper investigates the relationship between financial development and economic growth in 12 East African countries (Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Rwanda, Seychelles, Sudan, Tanzania, and Uganda) for the period 1981-2007. The dynamic panel generalized method of moments (GMM) estimation is employed to test whether financial sector development has a positive impact in economic growth of East Africa. The
results show that each of 2 financial development measures (domestic credit provided to the private sector and liquid liability) has a positive impact on economic growth and is statistically significant at the 5% level. These results provide additional evidence to the literature. The findings suggest that governments in East Africa can spur long run and sustainable economic growth by developing their financial sectors. Therefore, policies aimed at improving financial development and intermediation should be promoted.