Financial sector development, savings and economic performance : a case study of Libya

The financial liberalisation theorem postulates that liberalising the financial sector is a route to increasing savings and investment, and thus the promotion of growth. Endogenous growth models suggest that financial sector development increases savings mobilisation, transfers savings into investments, and increases the productivity of investment, with the consequence of economic growth and improved economic performance. However, in practice, experience has shown that a number of developing countries do not demonstrate this kind of relationship, and have rather, recorded relatively low growth despite achieving high savings rates. It is argued that the reason why few authors have found empirical evidence supporting the notion that saving causes growth in developing countries, and have found instead that growth causes savings, is these scholars' failure to consider the productivity of investment financed by savings, evidenced by the tendency to use aggregate measures of savings. This work proposes that the quality of saving is important, and instead of using gross saving, financial savings is used as a measure of savings. Despite the implementation of reforms and liberalisation in the financial sector, especially the banking industry, as the major elements of the economic reforms and structural adjustment programmes in Libya in the early 1990s, the resulting improved economic performance has not been followed by sustained economic growth and development, and investment rates are still insufficient to achieve this. Therefore, the purpose of the study is to identify the role of the financial sector, examining the impact of its development on saving, and on the growth of the Libyan economy. The methodology used in this research involved the quantitative approach. The quantitative aspect was based on an empirical assessment of the importance of financial sector development by using time-series econometric techniques including the unit root test, testing for cointegration and causality for the variables of the study. The results indicate that the impact of the real interest rate on financial saving and domestic investment is negative in the long run. The impact of real output on financial savings and domestic investment is positive in the long run. Credit as an indicator of financial sector development, has a very small impact on domestic saving in the long run and is highly insignificant in the long run. The causality test results indicate that causality runs from growth to financial savings, from growth or real output to credit. The study suggests that more attention should be paid to other aspects of financial liberalisation and financial reforms because liberalising the interest rate is not only the key aspect of financial sector reform.EThOS - Electronic Theses Online ServiceGBUnited Kingdo