Financial Institutions and Economic Growth : The case of Nepal

Abstract: Financial Institutions have been regarded to be the core area of economic development. However, Nepal could not achieve satisfactory level of economic development and growth due to Maoists war (1996-2006) and the political instability. The increase in size and number of commercial banks are limited only in the urban areas so that banking services are not accessible to the general public. This paper examines interaction between financial development and economic growth in Nepal employing correlation analysis, regression analysis, financial ratios and other related theories. As we found that financial institutions have grown rapidly which has implication in overall economy of the nation. The economic indicators such as GDP, GDP per capita, loan assets of commercial banks, investment, deposit, number of commercial banks, and inflation rate from fiscal year 2001 to 2007 are used for the analysis of this study. The relevant ratios of commercial banks such as deposit, investment, and profitability are found to be in increasing trend. The growth rate of GDP/capita is however volatile in the study period, the regression result of Deposit/GDP is weakly significant under the study period {(0,06)'}. The investment growth rate is not significant at all possibly due to the time lag of the effect of investment on the economic development. Furthermore, correlation between Growth rate of GDP and deposit/GDP (ρ=0.49). The Growth rate of GDP and investment over GDP is positive related with a correlation coefficient of 0.82. This has confirmed our beliefs in the set out of the thesis.