The impact of Financial Development on Economic Growth in Tanzania: 1967-2015

This study explores empirically the causal relationship between financial sector development and economic growth in Tanzania. The study has three main objectives which include: (i) determining the relationship between financial sector development and economic growth in Tanzania. (ii) to determine the direction of causality between financial sector development and economic growth in Tanzania; and, (iii) to suggest policy recommendations based on the empirical findings. Unlike many previous studies, the study uses extended broad money (M3) as a percentage of Gross Domestic Product (GDP) s a proxy for financial sector development, nominal exchange rate, inlation rate and human capital against growth in real GDP per capital. The study used time series data from the period 1967 to 2015 by employing the Engle and Granger Co- integration test and the Granger causality test under a Vector Auto regression (VAR) framework. The results reveal existence of positive and insignificant relationship between financial development and economic growth in Tanzania. In addition, there is no bi-directional causality relationship between financial sector development and economic growth in Tanzania in both the short-run and the long-run. Financial sector development causes economic growth and not vice versa. Therefore, the study recommends that monetary authorities should put forward policy which could bring more finance to the channels of real sectors in order to have significant impact on economic growth.