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

The financial liberalisation theorem postulates that liberalising the financial sectoris a route to increasing savings and investment, and thus the promotion ofgrowth. Endogenous growth models suggest that financial sector developmentincreases savings mobilisation, transfers savings into investments, andincreases the productivity of investment, with the consequence of economicgrowth and improved economic performance. However, in practice, experiencehas shown that a number of developing countries do not demonstrate this kind ofrelationship, and have rather, recorded relatively low growth despite achievinghigh savings rates.It is argued that the reason why few authors have found empirical evidencesupporting the notion that saving causes growth in developing countries, andhave found instead that growth causes savings, is these scholars' failure toconsider the productivity of investment financed by savings, evidenced by thetendency to use aggregate measures of savings. This work proposes that thequality of saving is important, and instead of using gross saving, financialsavings 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 reformsand structural adjustment programmes in Libya in the early 1990s, the resultingimproved economic performance has not been followed by sustained economicgrowth and development, and investment rates are still insufficient to achievethis. Therefore, the purpose of the study is to identify the role of the financialsector, examining the impact of its development on saving, and on the growth ofthe Libyan economy.The methodology used in this research involved the quantitative approach. Thequantitative aspect was based on an empirical assessment of the importance of financial sector development by using time-series econometric techniquesincluding the unit root test, testing for cointegration and causality for the variablesof the study. The results indicate that the impact of the real interest rate onfinancial saving and domestic investment is negative in the long run. The impactof real output on financial savings and domestic investment is positive in the longrun. Credit as an indicator of financial sector development, has a very smallimpact on domestic saving in the long run and is highly insignificant in the longrun. The causality test results indicate that causality runs from growth to financialsavings, from growth or real output to credit. The study suggests that moreattention should be paid to other aspects of financial liberalisation and financialreforms because liberalising the interest rate is not only the key aspect offinancial sector reform.

Level dc:type.qualificationlevel

Doctoral (Level 8)

Year dc:date.issued

2007

Author dc:creator

• Husein, NM

Language dc:language

en

Identifier

oai:salford-repository.worktribe.com:1337108

OAI identifier oai:identifier

oai:salford-repository.worktribe.com:1337108