ABSTRACT
In a developing economy, the financial sector can play an important role in furthering economic development. 1 For an economy to grow, resources must be channeled from income into capital accumulation. Economic development requires that this new capital be allocated to new products, new enterprises, new industries, and new regions. Development of the economy brings complexity to the transfer of resources from savers to borrowers, stimulating financial development. New forms of financial instruments are introduced, new financial enterprises are started in new locations, and financial institutions become more important in the functioning of the economy. In particular, the extent of financial intermediation between ultimate lenders and ultimate borrowers increases. Financial development in turn fosters economic development by increasing the efficiency of capital markets.
