thesis on financial sector development

• Help & FAQ

Essays on Financial Development

• Hassan Alalmaee
• Aston Business School

Student thesis : Doctoral Thesis › Doctor of Philosophy

• Financial development
• Economic growth
• Banking stability
• Natural disasters
• Financial crises
• Financial structure

File : application/pdf, 870 KB

Type : Thesis

Academia.edu no longer supports Internet Explorer.

To browse Academia.edu and the wider internet faster and more securely, please take a few seconds to  upgrade your browser .

Enter the email address you signed up with and we'll email you a reset link.

• We're Hiring!
• Help Center

The Impact of Financial Sector Development on Economic Growth: The Case of Ethiopia

167 Research and Knowledge Management Office of St. Mary’s University The Impact of Financial Sector Development on Econo mic Growth: The Case of Ethiopia Dagim Tadesse Addis Ababa University Abstract Finance-growth nexus is one of the main debatable i ssues in the major economies of the world. Some argue that the impact goes from finance to growth while others argue that the impact is rev erse, i.e. economic growth lead financial sector development. There are lso others who suggest the relation is bi-directional. So, this st udy focused on examining the impact of financial sector developmen t o economic growth of Ethiopia by using annual data for the per iod 1980-2013.The study used time series econometrics model which was estimated by using Ordinary Least Square (OLS). In this study fi nancial sector development was proxied by credit extended to priva te sector to GDP ratio. The finding of this study suggests that fina nci l sector development has positive impact on economic growt...

Related Papers

Dejene Bekana

This empirical investigation using VAR approach and Johnson co integration found that financial development indictors are with negative coefficient and insignificant in the long run. In the long run degree of openness and government spending are the most important forces behind economic growth in Ethiopia. In the short run model, however, there exists strong evidence that domestic credit to the private sector, degree of openness, broad money or monetization, inflation rate and government spending are the prime sources of economic growth. The study concludes that financial sector development has a growth-stimulating effect on Ethiopian economy. However, the financial sector development in Ethiopia did not reach the minimum level needed to support long run economic growth. Hence, the paper recommends that encouraging saving culture should be pursued while facilitating the intermediation function of banking institutions to channel saving to its productive uses through financing growth ...

International Journal of Economics & Management Sciences

Tekilu Tadesse , Wondaferahu Mulugeta

This paper aimed to investigate the linkage between financial development and sectoral output growth with special emphasis on Agriculture, industry and service sectors in Ethiopia during the period from 1975 to 2016. The study has used Autoregressive Distributive lag (ARDL) bound testing approach via an augmented growth model to examine the linkage between the financial development, proxy by bank credit to sectors, and sectoral output growth. Furthermore, Vector Error Correction Model (VECM) was employed to investigate the direction of causality between financial development and sectoral output growth. The results of bound test confirmed that the long run relationship between explanatory variables and sector output growth with less co integration of agricultural output growth and respective independent variables. The empirical results of this study showed, that in the long run financial development had a less significant positive impact on agricultural and service sector output growth but, short run relationship was found to be insignificant. However, financial development has a positive and significant impact on industrial and aggregate output growth both in the short run and long run. Furthermore, VECM granger causality tests show that there is no causality between financial development and agricultural output growth both in long run and short run. However, uni-directional causality running from (1) financial development to industrial output growth both in the long run and short run which confirmed supply leading growth hypothesis (2) financial development to service sector output growth in the long run (supply leading) and in the short run running from service sector to financial development which supports demand leading hypothesis only in short run.

Journal of International Trade, Logistics and Law

Tekilu Tadesse

There are different evidences in the literature regarding the relationship between financial development and economic growth. Some studies have found bidirectional causality, others a unidirectional relationship while some found no causality between the two variables. The aim of this study was to see the direction of causality and to investigate the existence of a long run relationship between financial development and economic growth in Ethiopia. We use two variables namely private sector credit as percentage of GDP and broad money supply as percentage of GDP to indicate financial development and employ Auto Regressive Distributive lag Model( ARDL) to Bounds Testing to examine the long and short-run impact of financial development on Economic growth and Granger Causality Tests has conducted by using Vector error correction Model . The Bound test results suggest that long-run relationships exist between economic growth and both financial development indicators as well as other expla...

Orginal article

This paper investigates linkage between financial development and economic growth in Ethiopia during the period from 1975 to 2016 using Autoregressive Distributed Lag (ARDL) approach. The paper also schedules Vector Error Correction Model (VECM) in order to observe how fast the cointegrated variables convergence in long-run. Accordingly, the results of bound test confirmed that the long run relationship between explanatory variables and economic growth. The empirical results implied evidence of a long-run and short run positive impact of financial development on economic growth in Ethiopia. This implies financial sector and financial institution the input to support and accelerate economic growth short and long run. With regard to other control variables, except inflation and government expenditure as percentage of GDP, all variables significantly influence economic growth in the long-run. Other than inflation, government expenditure and trade openness, human capital and gross investment were the pioneer determinant of economic growth in the short run. Furthermore, VECM granger causality tests show that the direction of causality is running from financial development to economic growth both in short run and long run. This study found the 'supply-leading' hypothesis held in the case of Ethiopia.

Social Science Research Network

Daniel Frimpong Yeboah

Journal of Economic and Financial Sciences

thobeka ncanywa

Orientation: Financial sector development in a vast majority of sub-Saharan African countries has the potential to reduce the volatility of growth.Research purpose: This article is aimed at determining the influence of financial development on economic growth in selected sub-Saharan African countries.Motivation for the study: In most of the sub-Saharan countries, financial sectors are among the world’s least developed, and the absence of deep, efficient financial markets puts major constraints on economic growth.Research approach/design and method: This article employed panel autoregressive and distributive lag model to determine the relationship between financial development and economic growth.Main findings: The results indicated that there exists a short- and a long-run relationship between financial development and economic growth in the selected countries. In the long run, bank credit to the private sector and liquid liabilities have a positive influence on economic growth, wit...

Applied Economics and Finance

Urgaia Rissa

The study empirically analyses the contribution of Financial Sector Development to Economic Growth in East Africa over the period 1975-2014. A five variable dynamic panel Fully Modified Ordinary Least Squares FMOLS is employed to estimate the short-run and long-run parameters.The fluctuations of Financial Sector and Economic Growth are mainly explained by their shocks in the long run and the proportion in the variance slightly decreases over time while the accumulated response of Economic Growth to Financial Sector increases. The gain of this study, therefore, provides the Supply and Demand Leading Hypotheses; means Financial Sector accelerates and augments the economic growth and the Economic Growth enhances the Development of Financial Sector. The implications drawn from this study are the reforms in the Financial Sector; inclusiveness of Financial System and effective vigorously pursued expansionary monetary policy, which directs the economy, could be a comprehensive beneficial to the study countries.

International Journal of All Research Education and Scientific Methods (IJARESM)

Bealu Tukela

Finance-growth nexus is one of the main issues in the major economies of the world.This study aimed at examining effects of financial development on economic growth in Ethiopia using annual time series data from 1980 to 2019. Stationary tests were conducted using the Augmented Dicker Fuller (ADF) test statistic. The Autoregressive Distributed Lag (ARDL) and Bounds test for co-integration was conducted. The Granger Causality technique was employed. The findings reveal that financial sector development causes economic growth. Inflation had a negative impact on economic growth in line with a priori expectation.Credit to private sector and savings had a positive impact on economic growth. It is recommended that monetary policy makers ensure all stakeholders adhere strictly to laid down goals to guarantee financial development. Government should implement policies that promote financial sector development which will result in investment and economic growth. Key Words: ADF, ARDL,Financial Development, Granger Causality, Time Series.

RePEc: Research Papers in Economics

Sheilla Nyasha

Emeka Nkoro

Essays in Development Economics

The primary focus of this thesis is to explore important factors affecting the manufacturing sector in developing economies, with a specific focus on India. The first two chapters of this thesis investigate how financial and land-related policy reforms can significantly impact firm dynamics and resource allocation in manufacturing industries. This contributes to our understanding of how targeted policy measures can lead to substantial changes in firm growth and innovation. Furthermore, the third chapter explores the development of contextually relevant measures to assess the scope of quality differentiation in manufacturing industries. The first chapter, Bank Expansion, Firm Dynamics, and Structural Transformation: Evidence from India’s Policy Experiment, examines the impacts of bank expansion on firm dynamics and labor allocation. This paper focuses on a policy experiment in India designed to encourage bank expansion in ``under-banked'' districts. Empirical findings demonstrate significant growth in manufacturing firms in these districts due to eased credit access, resulting in increased capital accumulation, sales revenue, and employment. However, the expansion predominantly benefited incumbent firms, with minimal stimulation of firm entry or product innovation. The reform also induced notable labor reallocation towards manufacturing sectors, particularly in areas with lower agricultural productivity. The second chapter, Land Constraints and Firms: Evidence from India’s Urban Land Ceiling and Regulation Act, empirically examines the effects of land constraints on resource allocation and innovation in manufacturing firms, leveraging the staggered repeal of the Urban Land Ceiling and Regulation Act (ULCRA) as a natural experiment. The ULCRA, enacted in 1976, imposed restrictions on land holdings and transfers in India. The findings suggest that the repeal of the ULCRA significantly reduced land market frictions, leading to increased landholdings and transactions among affected firms, thereby enhancing their productivity and growth. The results demonstrate that easing land constraints plays a critical role in reducing misallocation and driving economic growth in the manufacturing sector. In the third chapter, Plants and the Scope for Quality Differentiation: An Empirical Study in India, a new proxy is introduced for determining the scope of quality differentiation in manufacturing industries, based on the slopes of Quality Engel curves. This proxy is empirically validated by establishing a positive correlation between price-plant size elasticities and the scope for quality differentiation. These findings suggest that the Engel slope may serve as a more suitable proxy for evaluating quality differentiation scopes, particularly in the context of developing countries. In all, the thesis not only sheds light on the intricate relationship between policy measures and industrial development, but also contributes to the understanding of quality differentiation in the context of emerging economies

Geographic Areas

• Economic development
• Economic policy
• Manufacturing industries
• Banks and banking
• Resource allocation
• Supply and demand

This item is currently under embargo. It will be available starting 2029-04-18.

More About This Work

• DOI Copy DOI to clipboard

• Open access
• Published: 07 November 2017

Financial sector development and economic growth: evidence from Cameroon

• Janice Tieguhong Puatwoe 1 &
• Serge Mandiefe Piabuo 1  

Financial Innovation volume  3 , Article number:  25 ( 2017 ) Cite this article

44k Accesses

43 Citations

6 Altmetric

Metrics details

For decades, African economies have embarked on financial sector reforms. However, the empirical implications of these reforms have been divergent. This paper investigates the impact of financial development on Economic growth using time series data in Cameroon. This investigation was carried out using three common indicators of financial development (broad money, deposit/GDP and domestic credit to private sector). Using the Auto Regressive Distributive Lag (ARDL) technique of estimation, it was discovered that there exist a short-run positive relationship between monetary mass (M2), government expenditure and economic growth, a short run negative relationship between bank deposits, private investment and economic growth equally exists. However in the long run, all indicators of financial development show a positive and significant impact on economic growth. This paper thus confirms the existence of a positive and long-term impact of all the indicators of financial development on economic growth through bound test. It is therefore proposed that the financial reforms in Cameroon should be pushed forward in order to boost the development of the financial sector thus an increase in its role on economic growth.

The accumulation of financial assets at a more rapid rate than the accumulation of non-financial assets is called financial development according to Shaw ( 1973 ). According to Levine ( 2004 ), financial development occurs when financial instruments, financial markets and financial intermediaries, reduce without necessarily eliminating the costs of obtaining information, the costs of executing contracts and the costs of transaction, as a consequence do a better job by offering financial functions. Economists’ understanding of the nature and relationship which exist between financial systems and economic growth has evolved over time.

The role of the financial system on economic development has attracted and received increased attention from both academia and policy makers (Ndikumana 2001 ), with resulting divergent views emerging. Over the past decades, focus on this area has increased, with mixed findings which remains a theoretical and empirical controversy (Boulika and Trabelisi 2002 ). Financial development has played a leading role in many developing economies. There is a widespread believe among policy makers that financial development enhances productivity which promotes growth. The various findings made on financial development and economic growth varies due to different methods used in research. Some researchers found that financial development has a positive effect on economic growth (Kar and Pentecost 2000 ; Boulika and Trabelisi 2002 ) while others arrive at an opposite conclusion (Lucas 1988 ; Stern 1989 ).

Contemporary finance researchers have extensively investigated the link between financial liberalization and other macroeconomics variables, but the role of financial development is not universally accepted. One of the oldest findings on the relationship between financial development and economic growth is based on Schumpeter ( 1912 ) who asserts that, the services provided by the financial intermediaries are important for innovation and development. According to Bagehot ( 1873 ) and Hicks ( 1969 ), development in the financial system played a critical role in industrialising England through the facilitation of capital mobilisation. Schumpeter ( 1912 ) harnesses the importance of the banking system in economic growth; financial institutions support innovation and creativity and thus enhance future growth by identifying and funding productive investments. Therefore, it facilitates the creation of wealth, trade and the formation of capital (Ahmed 2006 ). A further step taken by Fry ( 1978 , 1980 ) and Galbis ( 1977 ) suggested that, interventions to impose restrictions on the banking system such as credit ceilings and high reserve requirements have a negative impact on the development of the financial sector, which ultimately reduces economic growth. In addition, (Levine 1997 ) suggested that aiding risk management, improving liquidity and reducing transaction costs leads to financial system development and thus encourages investments.

However, Lucas ( 1988 ) and Stern ( 1989 ) suggested that there is no relationship between financial system development and economic growth. According to Lucas ( 1988 ) finance is an “overstressed” determinant of economic growth. Therefore, any strategies aimed at promoting financial system development would be a waste of resources, as it diverts attention from more relevant policies such as labour and productivity improvement programs, implementation of pro-investment tax reforms, encouragement of exports; amongst others.

Other researchers suggest that the financial system develops in response to improved economic growth. According to Robinson ( 1952 ) “where enterprise leads, finance follows”, that is, as an economy grows the financial sector responds to the demands of the economy. A number of studies (Gurley and Shaw 1955 ; Goldsmith 1969 ; Jung 1986 ; Kar and Pentecost 2000 ; Boulika and Trabelisi 2002 ; Islam 2004 ; Güryay et al. 2007 ) suggest a unidirectional causality running from growth to finance. Countries whose economies grow faster, are forced to devote more investment on improving their financial system in order to stabilise their economic environment (Padilla and Mayer 2002 ).

On the other extreme are those who suggest that financial system development is anti-growth (Van Wijnberg 1983 , Buffie 1984 ). Development in financial system facilitates risk amelioration and efficient resource allocation; this may reduce the rate of savings and risk, consequently leading to lower economic growth (Levine 2004 ). However, this follows the basic assertion that, where there is high risk there is high return.

From the empirical evidence above, it can be noticed that there is divergence in the effect of financial development on economic growth. These studies also show divergence in results of the direction of causality between financial development and economic growth in the short-run and in the long-run. These views vary due to changing dynamics of financial policies in the countries studied and the response of these economies to policies, level of development and governance equally vary substantially. All these divergent views give enough reasons to investigate the impact of financial development on economic growth in Cameroon. Previous studies carried out in Cameroon used co-integration regression model (Tabi et al. 2011 ), and panel regression model (Elie 2015 ). This paper distinguishes itself from the others in so many aspects; firstly it uses three indicators of financial development which permits the researchers to capture all aspects of bank based financial development. Secondly to the best of our knowledge, no paper has investigated the relationship between financial development and economic growth in Cameroon using the Auto Regressive Distributive Lag model (ADRL). This model permits the verification of short-run and long-run relationships, it equally allows the use of variables integrated at different levels and it produces robust results (Narayan 2005 ) and is appropriate when a sample size is small (Odhiambo, 2008). Previous studies in Cameroon did not capture recent economic and financial dynamics since the time frame of their studies date back to 2006. Thirdly, this paper will equally contribute to literature by incorporating recent time series data which captures recent policies aimed at liberation and regulation of the financial sector. In this direction, this paper seeks to respond to the following research question: Is there a short-run or long-run relationship between financial development and economic growth?

Financial system of Cameroon

Cameroon harbors the Bank of Central African States (BEAC), which is the central bank of all the member states of the Economic Community of Central Africa States (CEMAC) to which Cameroon belongs with headquarters being in Yaoundé. Commercial banks, postal banks (CAMPOST), insurance companies, non-banking financial institutions, and the Douala Stock Exchange (established in 2002) are under the supervision of this central bank. This central bank (BEAC) replaced the central bank of the states of Equatorial Africa which Cameroon became a member in 1972. In 1993 the member states of BEAC created a supervisory authority, known as Commission Bancaire de l’Afrique central (COBAC) whose role is to secure and regulate the regions banking system. In 1999, Cameroon’s banking system consisted of nine commercial banks with 60 branches. Although bank branches decreased from 105 in the year 1995 to 104 in the year 2005 and as well became concentrated in the big cities, there was however a significant increase in the number of banks from eight banks in 1995 to 10 in 2005. This number has increased further to 15 in 2017 with Credit Communautaire d’Afrique(CCA) gaining the status of a commercial bank. The banking sector plays a major role in the financial sector of Cameroon; it accounted for about 84.4% of the total assets of the financial sector in 2005, and contributed 19.6% to GDP. Although the financial sector in Cameroon is still not well-developed, it encompasses the largest financial sector in the CEMAC zone, and contributes about 55% of CEMAC’s financial assets in 2005, the bulk of which is from the banking sector.

Nevertheless, a number of factors have contributed to the current underdevelopment of the Cameroonian financial sector. The financial system in Cameroon which is still in its infancy operates with very limited amount of financial instruments and constitutes mostly of banks as the main arm, with an underdeveloped financial market. The underdevelopment of the Cameroonian banking sector can be attributed to financial repression with the key elements being the extensive presence of the government within the financial sector and government ownership of major financial institutions. For instance, in 1986, the government was the shareholder in six out of eight commercial banks, and possessed a majority ownership in two of them (IMF, 2007). In addition, there has been no significant development in institutions such as leasing institutions, housing institutions, and hire-purchase companies amongst others, with the activities of commercial banks in the country being reduced to a traditional banking function, focused on short-term lending, accounting for about 87.3% of all credit to the economy in 1995 (IMF, 2007). Also, the distribution of banks in the economy is heavily skewed towards urban centers thus making a significant part of the country denied access to banking facilities. Furthermore, the use of physical cash is as well still much rampant and some economic actors still having very little knowledge on other banking services and financial instruments that can facilitate their transactions.

Literature review

Empirical investigation of the relationship between financial development and economic growth is abundant globally. Empirical evidence over time has not been conclusive on this relationship with three prominent outcomes from these studies; positive, negative and no impact. The tables below shows a summary of studies in different countries or regions, their major findings and it equally indicates the methodology used. The objective is to have a global view of countries or regions with positive, negative and no impact (Tables  1 and 2 ).

Financial development has played a leading role in many economies of Less Developed Countries (LEDCs) and Africa especially. Although the relationship between financial development and economic growth has received widespread attention in the modern history of economics, the conclusions have been far from conclusive. The finance growth nexus debate can be traced to the work of Schumpeter ( 1911 ) during the early twentieth Century. The thrust of the debate has been whether financial development has any impact on economic growth, and if it has, whether the impact is positive or negative. However, there has been a widespread believe among policy makers that financial development enhances productivity and thus promotes growth. From the panel 1 perspective, Fry 1988 ; Beck et al.( 2000 ), Beck et Levine ( 2004 ), King and Levine ( 1993 ), Jeanneney et al. ( 2006 ) amongst other studies have found evidence that development of the financial sector leads(positive impact) to economic growth. In addition, from panel 2 perspective, Tabi et al. ( 2011 ), Elie ( 2015 ), Djoumessi ( 2009 ) and Madiefe ( 2015 ) have reinforced the argument that financial development has a positive impact on economic growth in Cameroon and some sub-Saharan African countries such as South Africa.

Despite the overwhelming evidence that financial system development has a positive impact on economic growth in panel 1 and 2, alternative points of views still exist. There are a number of studies that provide evidence in support of the fact that financial development has a negative impact on economic growth. Al-malkawi et al. ( 2012 ), De Gregorio and Guidotti ( 1995 ), Bernard and Austin ( 2011 ) amongst others found a negative impact of financial development on economic growth in certain countries. A close view of the major results shows developing countries are more likely to report a negative impact of financial development on economic growth. This can be due to country specific characteristics, institutional framework and governance related issues.

In addition to the strong view that there is a relationship between financial development and economic growth, irrespective of whether this relationship is positive or negative, there have been a few studies that suggest that financial development has no impact on economic growth. These studies provide evidence in support of the notion that financial development and economic growth are not related and they are two different phenomena that are independent of one another. Such studies include Bloch and Tang ( 2003 ), Levine and Zervos ( 1996 ), Ram ( 1999 ), Andersen & Trap ( 2003 ). Furthermore, some empirical studies such as Yıldırım et al. ( 2013 ), Hakeem and Oluitan ( 2013 ), Islam et al. ( 2004 ), Kar and Pentecost ( 2000 ) showed evidence that there exist a unidirectional causality from economic growth to financial development in some countries. On the other extreme, Adusei ( 2013 ) provides evidence that financial development undermines growth in an economy (financial development is an anti-growth factor).

Data and methodology

The time series variables retained for this study covers the period 1980-2014(34 years).The variables (dependent and independent) are extracted from the World Development Indicators (WDI, 2016) of the World Bank.

The empirical link between financial development and economic growth to be estimated in this paper is adapted from a simple model developed by De Gregorio and Guidotti ( 1995 ) and Abduroluman (2003). In this model the financial development variable is included in an endogenous growth model. The model shows how indicators of financial development through economic relations turn to have an impact on economic growth. The equation below shows the functional and econometric relationship between the variables of the study.

Where α = constant, ε t  = error term, while β 1, β 2, β 4, β 5, are coefficients.

Independent variables

Indicators of financial development.

Financial development is captured through two aspects of the financial system of Cameroon; financial depth and financial efficiency.

Financial depth

With inspiration from Financial Development and Structure Dataset (FDSD) and finance literature (Asongu 2011a , b , c , d ), this paper measures financial depth from two perspectives; Broad money which captures broad money and demand while financial system deposits captures savings and time deposits, which are both expressed as a percentage of GDP. Economic and financial sector indicators will be used, broad money (M2/GDP) and financial system deposits (Deposits).

Financial efficiency

The efficiency of a financial system is the ability of the system to perform its principal role of transforming deposits to credits (Asongu 2012 ). Domestic credit to private sector is used in this paper as an indicator of financial efficiency.

Control variables

Government expenditure.

This control variable captures the effect of government expenditure. The choice of variable is inspired by the fundamental role of public expenditure in spurring economic activities and development.

Private investment

This variable captures gross formation of fixed capital, and permits us to see how investment increases output which subsequently leads to economic growth.

Dependent variable

Gdp growth rate.

This variable captures the rate at which the economy grows from 1 year to another; it captures value added from year to year.

Model and estimation procedures

This research will make use of a technique suggested by Pesaran et al. ( 2001 ) known as Autoregressive Distributive Lag Model (ARDL), which is based on the general to specific modelling technique. In order words, this research utilises the newly proposed autoregressive distributive lag (ARDL) approach which was developed and introduced by Pesaran and Shin ( 1995 and 1998 ), Pesaran et al. (1996), Pesaran ( 1997 ) and Pesaran et al. ( 2001 ), and later revised by Nayaran ( 2005 ) for the case of small sample size data(30-80 observations).

The Autoregressive Distributive Lag (ARDL) model is adopted as a method of estimation in this study. This model is advantageous over other techniques of co-integration because it permits the use of variables that become stationary without differencing (I(0) and variables that become stationary after first differentiation I(1), it does not accept variables that become stationary after second differentiation (I(2)). Also, this technique can be applied irrespective of whether the variable is I(0), I(1) or fractionally co-integrated (Pesaran 1997 ). Rather than having a multiple equation to estimate as in the case of the Vector Autoregressive (VAR) model, it involves just a single-equation set-up, which makes it simple to implement and interpret. Also different variables can be assigned different lag-lengths as the model is entered. The ADRL technique is free of residual correlation since variables stand as a single equation; it is easy to derive the error correction model from simple linear transformation by integrating short run adjustments with long run equilibrium without loss of information. In addition, this model as well takes sufficient number of lags to capture the data generating process in a dynamic framework of general-to-specific modeling framework. Furthermore, the error correction term (ECT) which integrates short-run adjustments with long-run equilibrium without losing long-run information, can be derived from ARDL through a simple linear transformation.

The long-run and causal relationship between financial development and economic growth in Cameroon using the Narayan ( 2005 ) test will be performed in several steps. First, the order of integration of variables will be verified using the test of unit roots through the Augmented Dickey Fuller test (ADF) and Phillip-Perron test. A great advantage of Philips-Perron (PP) test is that it is non-parametric; that is, it does not require the selection of the level of serial correlation as in the case of ADF. Due to the complicated and dynamic structure of financial time series data, ADF and Phillip Perrons tests are best suited for test of unit roots. It instead takes the same estimation scheme as in Dickey Fuller (DF) test, but corrects the statistic to conduct for autocorrelations and heteroscedasticity. The Augmented Dickey -Fuller (ADF) test is assumed superior due to its popularity and wide application. The ADF test adjusts the DF test to take care of possible autocorrelation in the error terms by adding the lagged difference term of the dependent variable. As for the PP test, it as well takes care of the autocorrelation in the error term and its asymptotic distribution is the same as that of the ADF test statistic. However, ADF is commonly used because of its easy applicability. Then, the number of lags will further be verified using the Akaike information criteria and Schwarz information criteria. Secondly, the model will be estimated using Ordinary Least Square (OLS) technique and test for long-run causality between financial development and economic growth using the Narayan test. The Narayan test is preferred to that constructed by Peseran et al. (2001) because this test is best adapted for small sample sizes (30 to 80 observations) while Peseran et al. (2001) is adapted for large sample sizes (500 to 1000 observations). The third step entails the estimation of the long-run variables, and then residuals are converted and inserted as an error correction term in the model. The model is estimated with the error correction term in order to capture its long-run speed of adjustment. Also, the Wald Test is used to verify the short-run effect of financial development on economic growth.

The presence of an error-correction term among a number of co-integrated variables shows that changes in the dependent variable is a function of both the level of disequilibrium in the co-integration relationship (represented by the ECM) and the changes in other explanatory variables. This therefore implies that any deviation from the long-run equilibrium will feed back into the changes in the dependent variable, thereby forcing the movement towards the long-run equilibrium (Masih, 2002). However, this research explores the issues surrounding co-integration analysis and the Error Correction model within the Distributed Lag model framework that is, the Autoregressive Distributed Lag Approach to co-integration.

Recall that the basic form of an ARDL model is:

Where ε t is the random disturbance term which is serially independent and assumed to be well behaved or constant.

An Autoregressive Distributive Lag model is considered as an ARDL (p q) model whose reduced form is presented as:

Where, Y t is the dependent variable with its lags as independent variables. X t Is the lagged independent variables and ϵ t being the white noise.

Generally, using the lag operator L applied to each component of a vector.

L k X t  =  X t  −  k , it is easy to defined the lag polynomial A(L) and the polynomial vector B(L).

The ARDL (p, q) is

A detail specification of the model with respect to the variables of this study is presented below.

Where ∆ refers to the first difference operator and ε t being the error term.

After the estimation of the above model, the long-run causality test is carried out by comparing the results from the F-statistics of the Wald test. Implying the null hypothesis of the test will be:

μ 1 = μ 2 =0(no long-run relationship).

Against the alternative hypothesis.

μ 1  ≠  μ 2 ≠0 (a long-run relationship exists thus co-integration).

The F-statistics of this test is then compared with that of the Narayan critical values at 5% level of significance with unrestricted and no trend series. The long run variables are regressed and the error term inserted as an explanatory variable, this gives the error correction model (ECM)as seen below:

Where ect is the Error correction term.

The Wald test used is meant to verify if there exist short-run causality from financial development to economic growth.

The two sets of critical values reported in Pesaran et al. ( 2001 ) provides critical value bounds for all classifications of the regressors into purely I(1), purely I(0) or mutually co-integrated. If the calculated F- statistics lies above the upper level of the band, the null hypothesis is rejected indicating the presence of co-integration. On the other hand, if the calculated F -statistics is below the upper critical value, we cannot reject the null hypothesis of no co-integration. However, if the critical value lies between the bounds, a conclusive inference cannot be made without knowing the order of integration of the underlying regressors. Recently, Narayan ( 2005 ) argues that existing critical values which are based on large sample sizes cannot be used for small sample sizes. Hence, Narayan ( 2005 ) regenerated the set of critical values for the limited data ranging from 30 to 80 observations by using the Pesaran et al. ( 2001 )’s GAUSS code. With a limited annual time series data on Cameroon financial development and economic growth, this study employs the critical values of Narayan ( 2005 ) for the bounds F-test rather than Pesaran et al. ( 2001 ).

Tests of goodness of fit

Serial correlation.

To verify the presence of serial correlation in the model, the Breusch-Godfrey Serial Correlation LM Test is applied. If the probability of R-squared is significant, the null hypothesis is accepted and concluded that the model has no serial correlation, but if it is insignificant, the null hypothesis is rejected and concluded that the model is serially correlated.

Stability test (CUSUM test)

In addition, due to the structural changes in the Cameroon economy, it is likely that macroeconomic series may be subjected to one or multiple structural breaks. As a result of this, the stability of the short-run and long-run coefficients is checked through the cumulative sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests proposed by Brown et al. (1975). Unlike the Chow test which requires break point(s) to be specified, the CUSUM and CUSUMSQ tests are quite general tests for structural change in that they do not require a prior determination of where the structural break takes place. That is, the robustness of the model is verified using the tests for serial correlation, CUSUM and CUSUM squares test for the stability of the model.

Preliminary results 1.1 unit root test for Cameroon

The results of preliminary test will be presented in this section and it permits us to know the structure of the time series data. The results of the Unit root test, granger causality, lag length determination will as well be presented. Table  3 below shows the results of the unit root test.

The results above shows all the variables are integrated in the same order. This implies, all these variables will become stationary after first difference thus, they are integrated of order one. The conformity of these results is equally tested using the Phillips-Perron unit roots test, it shows that all variables are integrated of order one. This is in conformity with the results obtained from the Augmented Dickey Fuller test. This means that a linear combination of the variables will give a stationary series, thus a great possibility of co-integration. It is therefore imperative to test for the presence of co-integration, the bound test will be used, before that the number of optimal lags will be determined, this is done using the akaike and Swartz citeria, Table  4 below shows the results of this test.

Choice of lag length

It is very important to know the optimal lag length, especially in order to estimate the direction of causality. The Akaike and Schwarz criterion is used in this study. Table 4 below shows the results of these tests.

The Akaike information and Schwarz criteria used for determination of optimal lag length requires that, the lag length with the smallest critical value for both criterions be chosen. We see from above that lag 1 have the smallest Akaike and Schwarz information criteria. With information on the lag length, it is now possible to verify if the variables are co-integrated using the bound test technique.

Bound testing for co-integration analysis

The results of the co-integration test are presented below in Table  5 , unrestricted intercept and unrestricted trend is used. It is clear from the table that there is a long run relationship amongst the variables. The computed F-statistics (8.4) is higher than the critical values of 3.79, 4.25 and 5.23 at 10%, 5% and 1% respectively from the Narayan ( 2005 ) table. This means that the null hypothesis of no co-integration between financial development indicators and economic growth is rejected.

The table above indicates estimates of the finance-growth nexus, the effect of credit to private sector, money supply and deposits on economic growth was assessed. The results show that the 1 period lag has a positive and significant impact in the long run. The long run analysis reveals that, a 1% increase in credit to private sector leads to an increase in economic growth by 0.38% while 1% increase in money supply triggers an increase in GDP by 1.9%. The results equally indicate that increasing deposits by 1% leads to an increase in GDP by 1.24%. This therefore means there is a long run relationship between financial development and economic growth.

This finding confirms that of Mandiefe ( 2015 ) who analyzed the impact of financial development on economics growth for Cameroon and South Africa. Table  6 below shows the coefficients of the long run impact of financial development on economic growth in Cameroon.

The table above confirms the bound test results with a positive and significant long run relationship between the financial development indicators and economic growth. This positive and significant impact is coherent with the findings by Khan et al. (2005) and Khan and Qayyum (2006).

Error correction model (Table  7 )

The regression table above shows that there is a negative but not significant relationship between credit to private sector and economic growth in the short run, however in the long-run, this effect is positive and statistically significant. This therefore means that the efficient allocation of credit to profitable projects has the potential of improving economic activities and subsequently economic growth.

The supply of money (M2) has a positive and significant impact on economic growth in the short-run, thus using the banking sector to increase the supply of money would facilitate the financing of the economy. The regression results show a negative but significant impact on economic growth in the short-run. This is principally due to the over-liquid nature of the financing system where deposits are dominated with short term deposits (Piabuo et al. 2015 ). However, in the long-run, deposits can be used as a vital resource for long term investments which have significant effects on output and economic growth.

The error correction mechanism (ECM) is used to verify the short-run relationship between credit to private sector, deposits, monetary mass (M2) and economic growth (GDP). The rule for the existence of a short-run relationship between financial development and economic growth is that the coefficient of the error correction term should be negative and it should be significant. Our results above confirms this, thus we can conclude that the there is a return to equilibrium in case of disequilibrium at a rate of adjustment of 80.5%. This implies 80.5% of errors of previous year are corrected within the current year. The divergence of results in the short-run and long-run equilibrium explains the fragility of the financial system of Cameroon. The system cannot quickly adjust to shocks in the short-run, this is principally due to the dominance of the banking sector which is over liquid and information efficiency is very low in the system. The financial system is made up of the Douala stock exchange which is still at its embryonic stage (Piabuo et al. 2015 ) with very low capitalization and few listed firms, thus limiting short-run adjustments. The underdeveloped nature of the financial system is equally characterized by high information asymmetry which limits the effective financing of the private sector by banks thus reducing short run benefits to the economy.

Test for existence of serial correlation

Here the Breusch-Godfrey Serial Correlation LM Test is used; the table below shows the results of this test (Table  8 ).

The table above shows that there is no serial correlation and that our model is good. To further verify this, the stability test is used to see if our model is stable in the long-run.

Result of stability tests

To assess the stability of the long-run and short-run relationship between financial development and economic growth, the CUSUM and CUSUM-squared tests are applied at 5% level of significance. When the CUSUM line lies in-between the lines of the level of significance, it shows the model is stable. However, variables are unstable when the CUSUM line is out of these two lines.

CUSUM stability test (Fig.  1 )

We see from the graph above that the blue line lays within the 5% level of significance, thus there is a long- run stability between the variables in our model.

CUSUM stability test

CUSUM square stability test

This test is used to verify the stability of the model over time. This can be seen on the graph presented below (Fig.  2 ).

From the graph above, it can be seen that the CUSUM of Squares line lays in-between the lines of the level of significance. This implies the model is stable and thus can be used for causality, bound test and long-run association. The different tests carried out above have proven our model is suitable to estimate the causal link as well as the long and short-run relationship between financial development and economic growth.

Discussion of results, policy implication and conclusion

Discussion of results.

The findings in this paper have broadly confirmed the conventional view which sustains that financial development has a positive and significant impact on economic growth. Although the view may not be universal, it is widely believed that financial system development boosts economic activities in an economy which leads to economic growth. These results confirm those of Tabi et al. ( 2011 ) who used a time series data of 35 years to show that financial development had a positive and significant long-run effect on economic growth in Cameroon. These results as well collaborates with the findings of a study carried out by Beck et al. ( 2000 ) on the impact of financial development on economic growth in which it was discovered that there exist a positive link between the exogenous component of financial development and economic growth.

Evidence of long-run co-integration between financial development and economic growth in this study collaborates with the verifications made by Luintel and Kaln ( 1999 ) using the Multivariate Vector Auto Regressive model and found a double-causality link between financial development and economic growth in sample of 90 countries. However, these results contradict with the findings of Aghion et al. ( 2004 ) who found an insignificant direct impact of financial development on economic growth and further concluded that the level of credits as a percentage of GDP influences growth only in the intermediary stages of development.

The long- run relationship between financial development and economic growth in this study is in collaboration with the works of Mandiefe ( 2015 ) which shows that improvement in the financial sector consistently mitigates investment and therefore boosts growth in an economy. Hence, the structural reforms such as financial liberalization which was engineered by the IMF in the 1980s and has been adopted by policy makers in Cameroon play most of the part to financial sector development. The objective of these reforms has been to reduce trade barriers and increase foreign investment in the country (Asongu 2014 ). However, it is interesting to note that effective economic freedom has consistently been found to improve on financial allocation efficiency (Asongu 2013 d) which diminishes issues of surplus liquidity. This eventually recourse both formal and informal financial services and therefore leads to investment in both formal and informal sectors (Piabuo et al. 2015 ). In addition, with advancement in ICTs, the Cameroonian banking industry is increasingly becoming synchronized that is, the rate at which banks adjust when is shocks is growing leading to a fall is bank crisis.

The mechanism that translates financial development to economic growth is divergent in Africa. This is principally because the level of financial development and liberalization is not uniform among countries. The results of this study indicates that there is a long-run relationship between financial development and economic growth, in the short-run, credit to private sector and investment have a positive impact on economic growth. Mandiefe ( 2015 ) highlights thatcountries with well-developed financial system turn to converge towards their long-run equilibrium faster than countries with less developed financial system.

Policy implication

This study outlines the importance of suitable financial policies in Cameroon and goes further to extend literature on the positive impact of financial development on economic growth. From the empirical results which was based on financial system development, it has been proven consistently that financial development is a fundamental determinant of economic growth of many nations with Cameroon inclusive and an increase in the activities of this sector further mitigates growth. The principal policy recommendation therefore is that adequate consideration and proper recognition such as provision of suitable financial reforms should be given to the financial sector in Cameroon as a determinant of economic growth.

This paper highlights the positive and significant impact of financial development on economic growth which was earlier analyzed by authors such as Bangehot ( 1873 ) and Schumpeter ( 1911 ).The unit root, co-integration and the granger causality tests were conducted to reveal these interesting results. The results from this study show that all variables included in the model were integrated in the same order. It equally shows that there exist co-integration between financial development and economic growth; there is a long-run relationship between the variables in the study. In addition, unilateral relationships were discovered to run between variables in this study. This therefore implies that by increasing the amount of money supply in the economy, improving the functions of financial institutions and intermediaries, and improving the investment environment of Cameroon will boost economic growth, which will eventually lead to economic development.

Adu G, Marbuah G, Mensah JT (2013) Financial development and economic growth in Ghana: does the measure of financial development matter? Review of Development Finance 3(4):192–203

Article   Google Scholar  

Adusei M (2013) Financial development and economic growth: evidence from Ghana. International Journal of Business and Finance Research 7(5):61–76

Google Scholar  

Aghion, P., Howitt, P., and Mayer-Foulkes, D. (2004), “The effect of financial development on convergence: theory and evidence”, NBER working paper 10358

Book   Google Scholar  

Ahmed AD (2006) The impact of financial liberalization policies: the case of Botswana. Journal of African Development 1(1):13–38

Al-Malkawi HAN, Marashdeh HA, Abdullah N (2012) Financial development and economic growth in the UAE: empirical assessment using ARDL approach to co-integration. International Journal of Economics and Finance 4(5):105–115. https://doi.org/10.5539/ijef.v4n5p105

Andersen TB, Tarp F (2003) Financial liberalization,financial development and economic growth in LDCs. J Int Dev 15(2):189–209

Asongu, S. A. (2011a): “New financial intermediary development indicators for developing countries”. MPRA Paper No. 30921

Asongu, S. A. (2011b): “Law, finance, economic growth and welfare: why does legal origin matter?. MPRA Paper No. 33868

Asongu, S. A. (2011c): “Financial determinants of human development in developing countries”. MPRA Paper No. 33949

Asongu, S. A. (2011d): “Law, finance and investment: does legal origin matter?”. MPRA Paper No. 34698

Asongu SA (2012) Financial sector competition and knowledge economy: Evidence from SSA and MENA countries. J Knowl Econ

Asongu SA (2013) How has politico-economic liberalization affected financial allocation efficiency? Fresh African evidence. Econ Bull 33(1):663–676

Asongu SA (2014) Liberalization and financial sector competition: a critical contribution to the empirics with an African assessment. South African Journal of Economics

Bagehot W (1873) Lombard street: a description of the money market. John Murray, London

Beck T, Levine R (2004) Stock markets, Bank and growth: panel evidence. J Bank Financ 28:423–442

Beck T, Levine R, Loayza N (2000) Finance and the sources of growth. J Financ Econ 58:261–300

Bernard AU, Austin A (2011) The role of stock market development on economic growth in Nigeria:a time-series analysis. African Research Review 5(6):213–230

Bloch H, Tang SHK (2003) The role of financial development in economic growth. Prog Dev Stud 3(3):243–251. doi: 10.1191/1464993403ps063pr

Boulika G, Trabelisi M (2002) Financial development and long-run growth: granger causality in bivariate VAR structure. Evidence from Tunisia:1962–1997

Buffie E (1984) Financial repression, the new structuralists, and stabilization policy in semi-industrialized economies. J Dev Econ 14:305–322

Christopoulos D, Tsionas E (2004) Financial development and economic growth: evidence from panel unit root and cointegration tests. J Dev Econ 73(1):55–74

De Gregorio J, Guidotti PE (1995) Financial development and economic growth. World Dev 23(3):433–448

Djoumessi, E. C. (2009)’ “Financial development and economic growth: a Comperative study between Cameroon and South Africa”, Submitted in fulfillment of the requirements for the degree of master of commerce

Elie N (2015) Financial development and economic growth in sub-Saharan Africa: a dynamic panel data analysis. European Journal of Sustainable Development 4(2):369–378

Fry MJ (1978) Money or capital or financial deepening in economic development. J Money, Credit, Bank 10(4):464–475

Fry MJ (1980) Savings, investment, growth and the cost of financial repression. World Dev 8(4):317–327

Fry MJ (1988) Money, interest and banking in economic development. Johns Hopkins University Press, Baltimore

Galbis V (1977) Financial intermediation and economic growth in less-developed countries: a theoretical approach. J Dev Stud 13(2):58–72

Goldsmith RW (1969) Financial structure and development. Yale University Press, New Haven

Gurley JG, Shaw ES (1955) Financial aspects of economic development. Am Econ Rev 45(4):515–538

Güryay E, Şafakli OV, Tüzel B (2007) Financial development and economic growth: evidence from northern Cyprus. International Research Journal of Finance and Economics, ISSN 1450-2887(8):57–62

Hakeem, M., & Oluitan, O. (2013). Financial development and economic growth in SSA: a panel econometric approach . Res Appl Econ , 5(2), 42-69. doi: 10.5296/rae.v5i2.1492

Hicks J (1969) A theory of economic history. Claredon Press, Oxford

Huran P, Chun W (2013) Financial development and economic growth: a new investigation. J Econ Dev 38(1)

Ikhide SI (1993) Positive interest rates: financial deepening and the mobilization of savings in Africa. Development Policy Review 11(4):367–382

Islam MR, Habib MW, Khan MH (2004) Time series analysis of finance and growth. The Bangladesh Development Studies 30(1/2):111–128

Jeanneney SG, Hua P, Liang Z (2006) Financial development, economic efficiency, and productivity growth: evidence from China. Dev Econ 44:27–52. doi: 10.1111/j.1746-1049.2006.00002.x

Jung WS (1986) Financial development and economic growth: international evidence. Econ Dev Cult Chang 34:333–346

Kar, M. and E. J. Pentecost. 2000. "Financial development and economic growth in Turkey: further evidence on the causality issue,"Loughborough University economic research paper no. 00/27

King RG, Levine R (1993) Finance and growth: Schumpeter might be right. Q J Econ 108(3):717–737

Levine R (1997) Financial development and economic growth: views and agenda. J Econ Lit 35:688–726

Levine, R. (2004), “Finance growth, theory, evidence, and mechanism”, In Handbook of Economic Review , Vol. 88 , n0 3 , PP. 537 - 558

Levine R, Zervos S (1996) Stock market development and long run growth. World Bank Econ Rev 10(2):323–340

Lucas R (1988) On the mechanics of economic development. J Monet Econ:3–42

Luintel KB, Khan M (1999) A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR. J Dev Econ 60(2):381–405

Mandiefe, PS,(2015) The impact of financial sector development on economic growth: analysis of the financial development gap between Cameroon and South Africa (May 2015). Available at SSRN: https://ssrn.com/abstract=2616296 or doi: 10.2139/ssrn.2616296

Narayan P (2005) The saving and investment nexus for China: evidence from co-integration tests. Appl Econ 37(17):1979–1990

Ndikumana, L. (2001),Financial markets and economic development in Africa, political economy research institute, University of Massachusetts Amherst, working paper series, number 17

Padilla, S.B., Mayer, H.P. (2002), Is Financial Development Important for Economic Growth in Slovenia. http://www.epoc.uni-bremen.de/publications/pup2003/files/Budapest_Padilla.PDF

Pesaran MH (1997) The role of economic theory in modelling the long-run. Econ J 107:178–191

Pesaran MH, Shin Y (1995) Estimating long-run relationships from dynamic heterogeneous panels. J Econ 68:79–113

Pesaran MH, Shin Y (1998) Generalized impulse response analysis in linear multivariate models. Econ Lett 58:17–29

Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econ 16:289–326

Piabuo SM, Baye FM, Tieguhong JC (2015) Effects of credit constraints on the productivity of small and medium-sized enterprises in Cameroon. Journal of Economics and International Finance 7(9):204–2012. doi: 10.5897/JEIF2015.0688

Ram R (1999) Financial development and economic growth: additional evidence. J Dev Stud 35(4):164–174

Robinson J (1952) The generalization of the general theory. In: The rate of interest and other essays. MacMillan, London

Schumpeter JA (1911) The theory of economic development, an inquiry into profits, capital, credit, interest, and the business cycle, translation 1934. Harvard University Press, Cambridge Second Printing 1936; third printing 1949

Schumpeter JA (1912) Theorie der Wirtschaftlichen Entwicklung (the theory of economic development). In: Leipzig: dunker and Humblot, translated by Redvers Opie. Havard University Press, Cambridge, MA

Seck D, ElNil Y (1993) Financial liberalization in Africa. World Dev 21:1867–1881

Shaw ES (1973) Financial deepening in economic development. Oxford University Press, New York

Stern N (1989) The economics of development: a survey. Econ J 99(397):597–685

Tabi A, Njong A, Neba C (2011) Financial development and economic growth in Cameroon. Journal of Economics and International Finance Vol 3(6):367–375

Ujunwa A, Salami OP (2010) Stock market development and economic growth: evidence from Nigeria. European Journal of Economics, Finance and Administrative Sciences 25:44–53

Van Wijnberg S (1983) Interest rate management in LDCs. J Monet Econ 12(3):433–452

Yıldırım S, Özdemir BK, Doğan B (2013) Financial development and economic growth nexus in emerging European economies: new evidence from asymmetric causality. International Journal of Economics and Financial Issues 3(3):710–722

Download references

Acknowledgements

We Thank Dr. Chupezi Julius for his advice and encouragement while we were working on this paper.

Funding for this paper is entirely by the authors. Sir, I will be very happy to have my article published in your prestigious Journal. Accept expressions of my greatest satisfaction and joy.

Author information

Authors and affiliations.

TTRECED-CAMEROON, Yaounde, Centre, Cameroon

Janice Tieguhong Puatwoe & Serge Mandiefe Piabuo

You can also search for this author in PubMed   Google Scholar

Contributions

This work was carried out in collaboration between all authors. Author PJT designed the study developed the theoretical and empirical literature review equally contributed in the discussion of results. Author SMP performed the statistical data analysis and discussion of results. Both authors read and approved the final manuscript.

Corresponding author

Correspondence to Janice Tieguhong Puatwoe .

Ethics declarations

Competing interests.

The authors declare that they have no competing interests.

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License ( http://creativecommons.org/licenses/by/4.0/ ), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

Reprints and permissions

About this article

Cite this article.

Puatwoe, J.T., Piabuo, S.M. Financial sector development and economic growth: evidence from Cameroon. Financ Innov 3 , 25 (2017). https://doi.org/10.1186/s40854-017-0073-x

Download citation

Received : 05 January 2017

Accepted : 20 October 2017

Published : 07 November 2017

DOI : https://doi.org/10.1186/s40854-017-0073-x

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Financial development
• Economic growth
• Financial intermediation
• Endogenous growth

World Bank Returns to the Cat Bond Market Providing Financial Protection to Jamaica

Washington D.C., April 25, 2024 - The World Bank (International Bank for Reconstruction and Development, or IBRD, AAA/Aaa), priced a catastrophe (cat) bond that finances US$150 million of insurance coverage for the Government of Jamaica against named storm events. This is the renewal of the World Bank’s 2021 cat bond for Jamaica, which was the first small island state to independently sponsor a cat bond.

Jamaica is exposed to tropical cyclone events that threaten not only lives and livelihoods, but also the country’s economic outlook. For Jamaica, the cat bond forms part of a multi-layered disaster risk financing strategy reducing the fiscal burden of natural disasters while allowing the government to respond swiftly.

The cat bonds were issued under IBRD’s “capital at risk” notes program, which can be used to transfer risks related to natural disasters and other risks from developing countries to the capital markets. The bonds’ parametric structure makes funds readily available to finance insurance payouts to Jamaica if a severe tropical cyclone event occurs. Payouts to Jamaica will be triggered when a named storm event meets the criteria for location and severity set forth in the bond terms. The cat bond attracted 15 global investors, providing the funding for catastrophe insurance to Jamaica for four hurricane seasons. 

“Jamaica is pleased to have sponsored the second catastrophe bond in the international capital markets protecting Jamaica against natural disasters with the much appreciated support and assistance of the World Bank. Consistent with our National Natural Disaster Risk Financing policy, we seek to ensure the availability of fiscal resources to enable an immediate response to emergency expenditures that could arise from a direct hit by a high intensity hurricane. This catastrophe bond covers hurricane seasons 2024, 2025, 2026 and 2027 and complements other disaster risk financing instruments that we have in place. We express our gratitude for the Hong Kong Insurance Authority who supported the transaction financially,”  said Dr. Nigel Clarke, Minister of Finance and the Public Service, Government of Jamaica .

“ We are proud to have partnered with Jamaica for the second time on a cat bond transaction. Over recent years, Jamaica has done a very impressive job with its fiscal consolidation. Through its comprehensive disaster risk strategy, of which this cat bond renewal plays a critical part, Jamaica is proactively protecting its fiscal position against risk in a manner that could become a model for other countries vulnerable to natural catastrophe risk ,” said Jorge Familiar, Vice President and Treasurer of the World Bank.

“The need for the Caribbean to prepare for disaster impacts cannot be overstated, as it is one of the most vulnerable regions globally. Important to this process is having available resources and the World Bank is pleased to support Jamaica’s catastrophe bond, which will help the country respond and rebuild quickly in the event of an impact,” said  Lilia Burunciuc, Country Director for Caribbean Countries, World Bank.

Aon Securities and Swiss Re Capital Markets were the joint structuring agents and joint bookrunners for the transaction. AIR Worldwide is the risk modeler and calculation agent.

The cat bond will be listed on the Hong Kong Exchange (HKEX), which is the second time the World Bank lists a cat bond in Hong Kong.

“ Aon Securities LLC and Aon Securities (Hong Kong) Ltd. are privileged to work with the World Bank in its latest capital market transaction supporting the Government of Jamaica. With a strategic emphasis on initiatives, including risk management and resiliency, aimed at the positive economic response to climate change and finance emergency response, the Government of Jamaica continues to demonstrate exemplary leadership in the capital markets arena. We are deeply committed to contributing to this mission,” said Paul Schultz, CEO Aon Securities.

"Swiss Re Capital Markets is proud to have partnered with the World Bank and the Government of Jamaica to successfully bring the World Bank’s  second catastrophe bond issuance to market supporting the Government of Jamaica.  This transaction mirrors the ground-breaking trigger mechanics of the first issuance in 2021 that allowed for faster payout post event and have since become a market standard for disaster relief transactions.  Once again, it highlights Swiss Re Capital Markets' continued commitment to the public sector and embodies Swiss Re’s mission to make the world more resilient," said Jean-Louis Monnier, CEO of Swiss Re Capital Markets Corporation.

Catastrophe Bonds Investor Distribution

Summary Bond Terms and Conditions

Disclaimers Net proceeds of the bonds described herein are not committed or earmarked for lending to, or financing of, any particular projects or programs.  Payments on the bonds described herein are not funded by any projects or programs.

This press release is not an offer for sale of securities of the International Bank for Reconstruction and Development ("IBRD"), also known in the capital markets as "World Bank".  Any offering of World Bank bonds described herein will take place solely on the basis of the relevant offering documentation including, but not limited to, the Prospectus, the Prospectus Supplement, the Final Terms and any related legal documentation.   Investing in the bonds described herein is speculative and involves a high degree of risk including the risk of a total loss of principal amount.  The bonds will be offered and sold, and may be reoffered and sold, only to investors who (i) are “qualified institutional buyers” within the meaning of Rule 144A under the United States Securities Act of 1933, as amended, and (ii) are residents of and purchasing in, and will hold the bonds in, a permitted U.S. jurisdiction or a permitted non-U.S. jurisdiction (and meet the other requirements set forth under “Notice to Investors” in the Prospectus Supplement). The bonds will not transferable except in accordance with the restrictions described under “Notice to Investors” in the Prospectus Supplement.

Contact Investor Relations and Sustainable Finance World Bank Treasury [email protected]

World Bank Treasury

This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser. To learn more about cookies, click here .

Questions? Visit the CDO Welcome Desk or email us at [email protected] .  |  CDO Welcome Desk Hours: M-F, 9am-4pm | The Virtual Interview Room is available for spring semester bookings!

• Bio / Pharma / Healthcare
• CPG / Retail
• Data Science & Analytics
• Entertainment, Media, & Sports
• Entrepreneurship
• Product Management
• Sustainability
• Diversity & Inclusion
• International Students
• Writing the Code – URM Programming
• MBA / LGO / MSMS
• Featured Jobs
• Career Central
• Parker Dewey: Micro-Internships
• Alumni Job Board
• CDO Employer Relations & Recruiting
• CDO Club Liaisons
• MIT Sloan Industry Advisors
• MIT Sloan Faculty
• MBA Career Peers
• Diversity, Equity, and Inclusion
• CDO Year In Review
• Employment Reports
• Employment Directories
• Employment Surveys

9 Keys to Successfully Break Into VC

• Share This: Share 9 Keys to Successfully Break Into VC on Facebook Share 9 Keys to Successfully Break Into VC on LinkedIn Share 9 Keys to Successfully Break Into VC on X

By  Lindsey Nicholson , MBA Career Advisor

Are you excited about VC and want to recruit, but not sure where to get started? VC is a small and competitive industry, and recruiting can be challenging, even for the most qualified candidates. Unlike some other career paths that have a clear route and structure, VC can feel like a vine-ridden jungle, with no clear direction. Recruiting in VC is highly self-driven, requires extensive networking, and takes grit and perseverance. Whether you are just starting your VC job search, or you have been searching for a while and feel like you’re not getting traction, the recommendations below will help you move forward or adjust course in the right direction! 

• Build a Strong Understanding of the Industry: Before you start thinking about your job search, start learning about the venture capital industry. Learn about VC investments, the structure of VC firms, what VCs do, the skills they use, and the terminology of the industry. Reading blog posts, listening to podcasts, signing up for newsletters, and talking with people who know/understand the space are a few great ways to do this. This foundational understanding is key to being able to do Step 2 well. Resources : How Venture Capitalists Make Decisions | Introducing the VC Business | VC Glossary of Terms
• Clarify Your Why: Once you learn more about VC, it is essential to clarify your why . Why do you want to pursue a career in VC? What specifically about the industry excites you? What kind of firm do you want to be at (what stage, sector, etc), and what kind of role do you want? Running a VC job search requires much more specificity than simply, “I want to work in VC.” Given that it is such a competitive industry, it’s particularly important to be able to communicate to others in the industry why you are excited about VC and how your unique background and experience align, so you need to identify where and how you can best contribute. Resources: Questions to Ask Yourself  
• Identify Your Targets: Once you clarify why you are interested in VC, start building a list of the companies and VCs you want to connect with. Be strategic (don’t reach out to any and every VC around) but also be open-minded. Go beyond the big names and look for firms with an investment thesis that you believe in and that aligns with your background, experience, and interests. Before reaching out, make sure they are a potential fit: does what you want align with the firm’s work? Resources: PitchBook | VC Mapping  
• Build Relationships: Building relationships in VC is the number one thing you can do to help your job search! It is a highly relationship-driven industry, and the relationships that you build will both help you in your search and in your career as a venture capitalist. Be prepared for every conversation: do your research on the firm, their investment thesis/portfolio, and whom you are talking with. Treat every conversation like an interview ; you never know when an opportunity will arise from a conversation, and the company is evaluating your potential candidacy even in less formal conversations. Add value whenever you can,and stay in touch/top of mind. Track who you networked with and when using Airtable , a Google Doc , etc. Students often underestimate how long it can take to build a relationship with a VC through networking, and underestimate how many conversations they may need to have. Resources: The Art of Networking in VC
• Connect with Founders: A significant part of what VC Associates do is source investments, so building your network of founders and connecting with startups is essential to success in VC. If you aren’t already immersed in the entrepreneurial ecosystem, now is the time to start. Engage with the rich entrepreneurial community at MIT and beyond; attend conferences and events for startups; find and connect with seed-stage companies that excite you. Plus, a great way to add value as you network with VCs is to send them a startup you’ve discovered that you think would be a great fit for their firm. Resources : PitchBook | Crunchbase
• Identify Your Gaps/Refine Your Skills: As you start talking to people in the industry and learning more about the core experiences and competencies VCs need, start thinking about any gaps you may have on your resume. In addition to industry knowledge, VCs need associates who can analyze market trends, financial statements, and business models. Strong quantitative skills including financial modeling are important, as well as the ability to conduct due diligence on potential investments and assess the viability of startups. Having experience in the startup ecosystem, either as a founder or operator, is also important. In addition to hard skills, soft skills are key; to be successful, venture capitalists need excellent networking and communications skills, and an ability to handle ambiguity. Be honest with yourself and ask, where are my gaps and where do I need to build my skill set? Aside from my skills, am I personally cut out for the VC space? Identify key areas for growth and map out how you will fill these gaps in the coming months/year. Tip : Paste your work experience from your resume into Copilot and ask it to identify any gaps on your resume for a VC role.
• Build Industry Expertise / Have an Opinion: Often students entering the VC industry are eager to be a generalist investor. While a deep and open curiosity will benefit your VC career, being too broad in your approach may not benefit your job search. Seasoned VCs typically advise those entering the industry to pick a sector and specialize. 1 What areas excite you? What is your unique background and what unique industry knowledge do you already bring? Develop an opinion and have a perspective on what’s happening in the startup ecosystem within a particular sector. This will make you memorable as you connect with others in the industry, give you something to talk about in interviews and set you up for success as you start your VC career.
• Gain Hands-on Experience: The best way to set yourself up for success in VC is to gain experience in VC. VCs usually hire people who have had previous experience in the industry and have developed pattern recognition to identify promising startups. There are an increasing number of part-time fellowships and programs for students to learn and gain hands-on experience in the industry. These can be paid or unpaid and can range in time commitment and responsibilities. Before diving in, make sure you do your research and talk to alumni of the program to get a sense of what you’ll be learning/doing. Resource : List of VC Fellowships
• Start Acting Like a VC: Lastly, a common piece of advice we hear is to “act like a VC before you are a VC”. Do the industry research, conduct market analysis, identify startups that excite you, and bring VCs deals that match with their investment thesis. Resource : How to Get Hired as a Venture Associate

VC is a competitive industry and VC is not a safe or guaranteed route (we always recommend having a Plan B in your back pocket). It takes patience, grit, determination, and an ability to navigate ambiguity. These characteristics of the job search itself also reflect the life of a venture capitalist, and if you find yourself burning out through the search itself, reflect on whether it’s the right career path for you. However, for those who are up for the challenge, we hope this guidance helps you trod the unbeaten path.

1 Three Pieces of Advice to New Investors | by Jeremy Liew | Lightspeed Venture Partners | Medium

• Share full article

Advertisement

Supported by

Square Feet

Americans Went All-In on Self-Storage. That Demand Is Suddenly Cooling.

Many developers, spurred by the pandemic to invest money in new self-storage facilities, have been caught short by this drop in demand.

By Martha C. White

Peter Chu, a retired lawyer living in Portland, Ore., pays nearly $400 a month for his storage unit in Seattle, where he used to live. That rate has gone up by roughly $150 since 2022.

Mr. Chu is caught in an industry that was booming a few years ago during the coronavirus pandemic but now finds it has built way too many rental units. As the industry cuts so-called street rates to entice new customers, its existing customers are paying substantially higher rates that are sometimes raised twice or more in a year.

The demand for self-storage cooled right as a glut of new supply hit the market, particularly in cities like Phoenix and Atlanta, said Tyson Huebner, the director of research at Yardi Matrix, a division of the property-management software firm Yardi.

“It was really attractive in the moment, but as soon as you go through planning, building, by the time you deliver, you’re kind of in a different market,” he said.

Many developers, spurred by the pandemic to invest money in new self-storage facilities, have been caught short by this drop in demand. In Sun Belt markets, where much of the self-storage spaces have been built over the past couple of years, falling rental rates combined with climbing construction and financing costs have prompted some developers to walk away from projects entirely.

According to SpareFoot, an online platform where people can search for storage units, the average monthly rent for a unit in the United States was $85.14 as of March, down from $108.58 two years earlier.

Last year, 245 self-storage construction projects were abandoned, more than double the number from the year before, according to Yardi Matrix.

Yardi Matrix forecast that self-storage revenue could outright decline in 2024 for the first time since the financial crisis in 2008. The sector faces what Michael Elliott, an equity analyst at the investment research firm CFRA, characterized as “significant headwinds” after years of growth. On average, the industry added 439 storage facilities annually from 2010 to 2019, according to Yardi Matrix. From 2020 to 2023, that number rose to 735.

One of the reasons for the drop in demand is that people aren’t relocating as much. During the pandemic, a wave of city dwellers fled their homes as offices closed, many searching for more outdoor space and residences closer to family. As people moved from apartments and condominiums, they often needed a place to put their stuff — and storage businesses raced to meet that demand.

But Americans are no longer migrating from urban centers as much. And since the Federal Reserve began raising rates two years ago to rein in inflation, the commensurate spike in mortgage rates put the housing market into a deep freeze. When the number of home sales hits a nearly three-decade trough, as it did in 2023, according to the National Association of Realtors, demand for storage — roughly half of which comes from people moving — also takes a hit.

“We’re probably closer to what would be a quote-unquote bottom with occupancy and rental rates,” Mr. Elliott said.

According to the Self Storage Association, a trade group, around 11 percent of U.S. households have a self-storage unit, but there isn’t enough new demand to make up for the many new facilities that have popped up around the country. Over the next two years, millions of square feet of self-storage projects are expected to open up.

Higher interest rates also make it harder for developers of storage facilities to finance construction.

Lee Menifee, who leads investment research for the Americas at PGIM Real Estate, a division of Prudential Financial, said that “most of the decrease in construction activity is attributed to higher construction costs and less availability of construction debt.”

For existing self-storage operators, it’s much more expensive to do business today, said Timothy Dietz, the president and chief executive of the Self Storage Association. Property taxes have increased, he said, as tax assessments climbed along with real estate values over the past couple of years. Property insurance has also become more expensive, particularly in parts of the country that face regular threats from natural disasters such as hurricanes and wildfires. And higher interest rates make it more expensive for businesses to refinance existing loans.

Aside from a handful of large, publicly traded companies, such as Public Storage and Extra Space Storage, the sector is fragmented compared with other classes of commercial real estate. The Self Storage Association estimates that three-quarters of the nation’s roughly 60,000 self-storage facilities are owned by small operators, many of them family businesses that lack the deep pockets and access to financing of their larger competitors.

But even large players aren’t immune to rising costs. Executives at Public Storage told investors on their quarterly conference call in February that property taxes, which have risen quickly as real estate values have climbed, were the company’s largest line-item expense.

These higher expenses are coming as self-storage operators have to lower their rates to compete with more players. Street rates — monthly rental rates offered to new customers — have been falling. As of November, Yardi Matrix found that nationwide rental rates had dropped roughly 4 percent on an annualized basis. Rates for climate-controlled storage units, which make up much of the new development, were down 4.4 percent.

Public Storage’s president and chief executive, Joe Russell, told investors on the conference call that “the new customer environment remains challenging.”

Joe Margolis, the chief executive of Extra Space Storage, expressed a similar outlook on the company’s recent quarterly call, telling investors, “The industry as a whole will likely face headwinds from lower new customer rates in the near term.”

Storage companies have been making up for lower rates — usually offered as promotional prices — by raising rates on existing customers. The rate increases are happening at a much faster pace, too. Previously, the increases would happen after customers had been renting for around a year, but “now, that’s hitting in Month 2 or 3 — the move-in rates now are almost like a promotional rate,” said Kristin Millington, the director of the self-storage and manufactured housing groups at Crow Holdings Capital, a real estate development and investment firm.

The businesses are banking on customers like Mr. Chu, the retired lawyer who is staying put despite having his rate increase so quickly and so sporadically. He said that although “it’s painful to see all my money going toward a storage unit,” he was unlikely to move the old computers and cellphones, photo albums, financial records and other personal items he kept there because he liked the center and its location.

“Tenants have become accustomed to using their storage as an extra closet; the desire to move isn’t there,” Ms. Millington said.

Mr. Huebner agreed, saying, “For the most part, most people won’t spend a weekend moving their stuff to chase a lower rate.”

“You see customer length of stay increase over the past few years,” he said. “That’s kind of been a long-term trend. Once people put stuff in storage, they kind of forget about it.”

Explore Our Business Coverage

Dive deeper into the people, issues and trends shaping the world of business..

TikTok Has Changed America: Has there ever been an app more American seeming than TikTok, with its messy democratic creativity, exhibitionism, utter lack of limits  and vast variety of hustlers?

Subscribe. Watch. Cancel. Repeat.: Many more people are jumping from one streaming subscription to another, a behavior that could have big implications  for the entertainment industry.

Manischewitz Courts a New Generation: The 136-year-old company’s products have been staples in American Jewish households for generations . After a major rebranding, the matzo ball soup comes with merch.

Inside Novo Nordisk: The company’s factories work nonstop  turning out Ozempic and Wegovy, its blockbuster weight-loss drugs, but the Danish company has far bigger ambitions, including transforming a small Danish town .

Golden Visa Programs: Spain is the latest European country to end its program, which brought in billions of euros  from real estate investors but worsened a housing crisis for locals.

Reshaping Discount Shopping: Pinduoduo, the Chinese discount shopping app , appeals to people seeking deals and “downgraded spending.”