Financial sector development, savings and economic performance: A case study of Libya
, PhD thesis, University of Salford.
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.
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