Macroeconomic determinants of financial development in Zambia (1990-2010)

Abstract

This study attempts to ascertain macroeconomic determinants of financial development in Zambia. In order to achieve this, financial development is measured by the banking sector development with private bank and other financial institutions credit to GDP ratio as a proxy. This is because of its ability to separate private credit meant for investment from public credit. The study is conducted using the Ordinary Least Square (OLS) technique with the application of cointegration and Error Correction Model in the estimation of the model. Empirical results from the error correction model reveal that inflation and real interest rate are negatively related to financial development. In addition, real GDP per capita, gross domestic saving, financial openness and trade openness are positively related to financial development. However, only inflation, real GDP per capita and gross domestic saving were statistically significant macroeconomic determinants of financial development in Zambia. Real interest rate, financial openness and trade openness are found to have no influence on financial development. Therefore, the empirical results suggest that policy makers should maintain macroeconomic stability in order to achieve financial development. The low and stable inflation, improved domestic saving and income level will enhance financial development in Zambia.