INTRODUCTION

1.1.         Background to the Study

Several arguments have been put forward about ways of improving the standard of living through a sustained growth process. This development has elicited paradigm shift in economic growth strategies and policies especially in developing economics and new frontiers were being explored to achieve economic growth.

The important role of finance in the process of economic growth and development was brought to lime light by the works of Bagehot (1873) and Schumpeter (1911). They pointed out the productivity and growth enhancing effects of services provided by a developed financial sector. They posit that the industrial revolution in England was the result of a functioning financial system that was instrumental in mobilizing and allocating long-term capital to the productive enterprises of the country. They argued that financial intermediaries play a crucial role in fostering technological innovation and economic growth by providing basic services such as mobilizing savings, monitoring managers, evaluating investment projects, managing and pooling risks, and facilitating transactions.

The seminal works of McKinnon (1973) and Shaw (1973) supported Schumpeter‟s view of promoting the development of financial sector to achieve economic growth. They criticized the financial repressionists‟ view adopted by many governments in developing countries in the early 1970s. The traditional justification for financial repression is that it is presumed to increase the rate of economic growth. This argument is based on the assumption that money and real assets are perfectly substitutable, that increasing returns in real asset markets relative to money market instruments will induce a change in investor behaviour, so shifting investment out of money market into capital investment.