1.2 Research questions
Throughout our study we will try to find solutions to the
following questions:
1. Does the level of financial development matter for Rwandan
economic
growth?
2. Is there a bi-directional influence between financial
development and economic growth?
1.3 Research objectives
1.3.1 General Objective
The main objective of this study is to assess the impact of
financial development on economic growth for Rwanda to determine whether
financial sector can be viewed as an alternative pillar for future economic
growth especially within the Vision 2020 frame work.
1.3.2 Specific objectives
1. To investigate whether the increase in credit to the private
sector had led to improvements in growth rate of GDP.
2. To determine whether the expansion of credit allocated by
banking institutions versus credit allocated by Central bank has led to
increase in growth rate of GDP.
3. To investigate whether the financial innovation has a
positive impact on GDP.
4.
To investigate whether the increase of credit to private sector
versus credit to public sector exerts a positive effect on economic growth.
5. To determine whether there is a bi-directional feedback
between proxies of financial development and economic growth.
1.4 Research hypotheses
a) The level of financial depth and sophistication positively
affects economic growth.
b) The increased share of banking institutions in credit
allocation has contributed to rise in growth rate of GDP.
c) The rise in share of credit to private sector in total
domestic credit is reflected in the growth of economic activities.
d) A bi-directional influence exists between the proxies of
financial development and the rate of growth of real per capita GDP
1.5 Significance of the study
Studies conducted on cross-sectional and panel data analyses
revealed the absence or weak link between economic growth and financial
development in developing countries. To the best of our knowledge, this is the
first study which aims to ascertain whether Rwandan country case fits with
those findings. With a weak agriculture sector and an infant industry sector,
the study will determine if a developed financial sector can be a new pillar of
Rwandan economy.
1.6 Scope of the study
The study analyses the link between financial development and
economic growth in Rwanda and covers the period of 1964 to 2005. The period
starts with the creation of the Central bank and is sufficiently long and
allows comparison with other studies.
1.7 Organization of the study
The rest of the study is structured as follows: chapter two
gives brief review of literature on the subject. Chapter three describes the
evolution of the financial sector in Rwanda. Chapter four presents the
methodology used, in chapter five we report our results and in chapter six we
conclude.
Financial Development and Economic Growth in Rwanda
CHAPTER 2
REVIEW OF LITERATURE ON FINANCIAL
DEVELOPMENT AND
ECONOMIC GROWTH
2.0 I ntroductio
The causality effect between financial development and
economic growth has been a controversial issue for long years. Some researchers
have found a positive impact of financial development on economic growth,
others, in cross-country or geographical regions and income groups, have found
a significance relationship for some geographical regions and none in others,
especially for developing countries. Even though the link between financial
development and economic growth is accepted, the direction of causality is
still a debate. In this chapter, we present a review of literature on this
issue from both theoretical and empirical grounds.
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