Impact of Financial Sector Development on Economic Growth: Evidence from Tanzania

Financial sector has always been potential ingredient in bringing growth in an economy, the indirect impact of financial markets and institutions through saving mobilization and credit expansion is of extraordinary importance. By employing Autoregressive Distributed Lags (ARDL) approach impact of financial sector on economic growth of Tanzania is examined. The results show that, in both long-run and short-run, financial development exerts significant but negative effect on economic growth contrary to our expectations. The study employs the ratio of broad money to GDP (financial depth) as a proxy measure of financial development, along with inflation rate, real interest rate, real exchange rate, share on of investment to GDP, proportion of development expenditure to total expenditure and dummy for structural reforms as control variables during our estimations. Results also suggest non-existence of causality between financial development and economic growth. Thus the study suggests strengthening data availability on flow of credit from financial institution to the public is necessary to materialize the effect of financial sector in Tanzania.