Financial development plays a vital role in the shaping up of the economy of a country. Financial development is assumed to have a catalyst role for economic development. The performance of financial development system determines economic growth through successful channeling of resources to the productive areas, which is prerequisite for economic growth. The provision of financial services, such as banking services, can directly contribute to poverty reduction and economic growth. It enables people to better manage their risks and facilitates investments. The importance of an adequate financial service provision has also been recognized for post-conflict peace building and reconstruction.
Financial Development and Economic Growth of Nepal
The investigation opportunities and demand for capital are the driving forces for the economic growth for which the mobilization of saving for investment and leading of saving or the deposit to the borrower is very important for all this financial institution provides the platform for the lender and borrower. And investors are the most important part of Banking and financial institutions, they play a significant role in investment. The provision of financial development services, such as banking services, can directly contribute to poverty reduction and economic growth. It enables people to better manage their risks and facilitates investments ( Benton and James, 2005).
Over the past decade,Nepal has made serious efforts to transform itself into a market-based economic system and adopted the policy of financial sector reforms. The financial development sector reform aimed at enhancing savings mobilization and credit allocation to the private sector. However, growth experienced less than expectation, which also affected the performance of its financial sector. Nepal formulated a comprehensive financial sector reform to deregulate the financial markets from decades of government intervention, mainly, by late 1980s and 1990s. Despite of the efforts on financial sector reform, critics argue that the reform has had little impact on mobilization of financial savings. Instead, the reform led to high nominal interest rates on leading (rather than deposit) and continuous devaluation of its currency (shrestha, 2005).
The existence of co-integration implies that there is long-run, or equilibrium relationship between financial development and economical growth. The statistically significant F-statistic confirms the fact that there is the bidirectional causality between long of per capital real GDP and log of money defined broadly to GDP.