Financial Services System Development and Economic Growth: Evidence from Nepal

The present study intends to estimate the impact of the development of financial services system on Nepal’s economic growth employing simple Ordinary Least Square technique on annual data from 1975 to 2011 regarding three proxies of financial development indicators and control variables for the robustness of the result. The bidirectional relationship between rate of growth of per-capita GDP and ratio of broad money to nominal GDP was analyzed through Granger Causality Test. The results showed that not all the measures of financial development indicators affect the economic growth. However, in the one lag form Liquid Liabilities of financial system to nominal GDP showed positive and significant impact on growth. As shown by the final equation, 1 percent increment in liquid liability to nominal GDP ratio would increase per-capita GDP by 0.15 percent by the next period. Among the control variables, the economic liberalization in terms of increasing volume of trade showed positive and significant impact on growth. The significant result of dummy also showed spurted Nepal’s position in economic liberalization from 1992 whereas the nation’s population growth has hindered it during the study period. The Granger Causality Test revealed that there was unidirectional causality from first difference of liquid liabilities to growth and supported the result from regression equation. Keywords