The impact of the banking sector development on the financial performance of the communication sector in sierra leone
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3.2 Related Theoretical Literature
In the early age of economic development economist (Schumpeter, 1952) in his book the theory of economic development originally published in 1911 observed that, the financial market especially the banks played a significant role in the growth of the real economy. He argued that, banks mobilize and 31 channel funds efficiently which, provide the necessary credit to entrepreneurs to finance investment in physical capital, adopt new production techniques thereby spurring technological innovation and setting stage for the creative destruction process, which sum up to economic growth. His argument was supported by (King & Levine, 1993) which present a cross country evidence consistent with that of Schumpeter’s view that financial system can promote economic growth, using data on 80 countries over a 30years period from 1960 to 1989. Various parameters implemented to test financial development are strongly associated with real per capital GDP growth, the rate of physical capital accumulation and improvements in the efficiency with which economic employ physical capital. His view implied that financial development causes economic growth, both Schumpeter and Levine hypothesis do not have enough base due to analytical issues. The supply-leading hypothesis was logically argued out by McKinnon (1973) in his studies, he argued that economic growth is hindered in a repressed financial system which is, characterized by interest rate ceiling, directed credit policies and high reserve requirement. According to him, this phenomenon lead to low level of savings, credit rationing and low investment. Therefore, he proposed financial liberalization which will allow the real rate of interest to rise thereby raising the financial savings. The crux of the matter is that, an increase in saving relative to real economic activity leads to an increase in financial intermediation, which in turn leads to an increase in productive investment and economic growth (Mckinnon, 1973). (Ayadi, "et al"., 2008) in their work argued that, The policy implication of this viewpoint is that, formulating policies that liberalize the financial system and enhance financial intermediation will result in high economic growth. However, most developing countries who implemented these policies raises many questions on the viability of this hypothesis as they failed to realized reasonable success, and even the country this study is conducted is a victim, as the financial sector was liberalized through the adjustment programmed implemented in 1988, yet the financial sector failed in its primary function of financial intermediation and promoting the growth of the real economy. |
