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Financial development and economic growth in Rwanda

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par Deogratias MR. DUSHIMUMUKIZA
University of Mauritius - Masters Degree in Economics 2010
Dans la categorie: Economie et Finance
  

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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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