FINANCIAL DEVELOPMENT

AND ECONOMIC GROWTH:

EMPIRICAL EVIDENCE FROM

NAMIBIA (1990 Q1-2011Q4)

Presentation Plan

1. INTRODUCTION

2. METHODOLOGY

3. RESULTS

4. CONCLUSION

1. INTRODUCTION

Main objective:

causal relationship between financial

development and economic growth

Motivation

Very few published research

Contribution to macroeconomic literature

The need for the country to formulate polices from

an informed position

1. INTRODUCTION…

Namibia financial services sector

Namibia is middle income country notindustrialising fast enough

Size of the sector is explained by: Size of the population (the market)

Number of companies doing business in Namibia

Protected commercial banks (four sinceindependence) whose roles are: Commercial banking services

Some of the merchant/investment banking services

Mortgage services

1. INTRODUCTION…

-4

-2

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

GD

P G

RO

WT

H R

AT

E (

%)

T IME IN YEARS

The Economic Growth rate of Namibia

1980-1989 growth rate was 3.3%

1990 -2011 growth rate was 4.4%

1. INTRODUCTION…

Rationale and Objectives of the Study

The contribution of the banks to national and globaleconomic growth cannot be overemphasised.

the financial services sector’s impact on resourceallocation cannot be overemphasised.

pioneering work on the financial development-economic growth relationship is attributed toSchumpeter (1912).

Schumpeter (1912) contends that well functioningfinancial intermediaries drive technologicalimprovement by choosing and funding entrepreneurswith the greatest probability to successfully implementinnovative products and production processes.

1. INTRODUCTION…

Study objectives:

To econometrically determine the causal links

between financial development and economic

growth in Namibia.

To establish how financial development and

economic growth influence each other by

applying impulse response functions and variance

decomposition techniques.

To highlight policy options the policy makers need

to consider.

2. METHODOLOGY

Φ and Ѱ both denote interest rates labour force and dummy for the

implementation of the first national development plan.

Used the VAR methodology based on OLS

VAR Granger Causality/Block Exogeneity Wald Tests

3. RESULTS

Table 4: Vector Autoregression Estimates: (p-values)

Equation 1 Equation 2

Adj R-squared 0.60603 0.63188

F-Statistic (Prob) 7152.021(0.0000) 6647.86(0.000)

DW Statistic 2.155249 1.993733

Jarque-bera (p-value) 615945(0.000)309.6723(0.0000)

B-G LM (probχ2 ) 3.55700(0.1689) 0.440576(0.8023

B-G-P test (probχ2 ) 8.357965(0.9086) 19.02971(0.2124)

ARCH test (probχ2 ) 0.089956(0.7642) 3.181991(0.2037)

NB: In the results above we show the coefficient of each variable and its calculated t-statistic in brackets ().

3. RESULTS

3. VAR Granger Causality/Block Exogeneity Wald Tests

Dependent variable: D(LNEG)

Excluded Chi-square df Probability

D(LNFD,2) 0.156072 5 0.9995

All 0.156072 5 0.9995

Dependent variable: D(LNFD,2)

Excluded Chi-square df Probability

D(LNEG) 13.71179 5 0.0175

All 13.71179 5 0.0175

3. RESULTS/ IMPULSE RESPONSE

FUNCTION

3. RESULTS/VARIANCE

DECOMPOSITION

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Percent D(LNEG) variance due to D(LNEG)

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Percent D(LNEG) variance due to D(LNFD,2)

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Percent D(LNFD,2) variance due to D(LNEG)

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Percent D(LNFD,2) variance due to D(LNFD,2)

Variance Decomposition

4. CONCLUSION

EG is explained by labour force all the other variablesincluded in Equation 1are insignificant

FD is explained by economic growth and all the othervariables in Equation 2 are insignificant

Possible Explanation of the Results

Level of development of the financial sector Number of banks

Branch networks of banks

Lack of financial depth and lack of competition

If banks are protected from competition, they becomecomplacent and inefficient Their service fees also go up (an issue that the BoN is currently

grappling with now)

Interest rates also go up

4. CONCLUSION

Recommendation

one way of reforming the financial sector inNamibia is to subject it to some competitionthrough the licensing of new local and foreignbanks taking into account the size of theNamibian banking market

This will help increase the volume of lendingeven small businesses with no collateralsecurity and possibly reduce the lending ratesand service fees as banks compete forcustomers.

The banking sector in Namibia still needs to bedeveloped and made more efficient so that it canlead to higher future economic growth rates.

I THANK YOU