Abstract:
Tests of the finance-growth nexus to date have not been conclusive on the nature & direction of the relationship
between economic growth and financial sector development. A number of studies on the role played by banks in
economic development have shown considerable variation across countries. In this paper we empirically
examine the causal and nature of relationship between financial sector development and economic growth in
Zimbabwe for the period 1980 to 2006; using time series analysis namely Granger Causality tests in a Vector
Autoregressive (VAR) framework. All variables were tested for stationarity using the Augmented Dickey–Fuller
(ADF) Test and became stationary in levels, 1st difference and 2nd difference. A general uni-directional
relationship was found to exist running from banking sector development to economic growth in Zimbabwe
hence the supply-leading hypothesis is supported. The study recommends that policy makers should come up
with policies that steer continuous growth of the banking sector. In this regard the government could reduce its
borrowings from the domestic money market, promote a savings culture by encouraging banks to increase their
deposit rates (through moral suasion) and attract more deposits for onward lending to the private sector and
improve the country’s low credit risk rating to lure foreign investors.
