In the globalization age, there are various thoughts about the relationship between financial structures and economic development. However, the empirical results are ambiguous and vary according to financial development measures, function form; estimation method; and data frequency (Elsayed, Attia Ahmed 2013). After the 1990s, the world witnessed a growing interest in exploring a possible link between financial structure and economic activities (Angadi, 2003). Over the last four decades, the relationship between financial structure and economic development has received considerable attention. The theoretical foundation of the relationship between finance and development goes back to Adam Smith. He stated that «the trade of Glasgow's city doubled in about fifteen years after the first erection of the banks in Scotland. (Smith, 1776, p. 315). Since then, the relationship between financial development and economic growth has gained more attention in the literature. Over the last four decades, one apparent critical aspect of financial sector development in the world economy is financial liberalization, affecting economic growth.
Keywords: globalization, relationship, financial structure, development, economic growth, payment services.
Over the last four decades, the relationship between finance and economic growth has received considerable attention. The theoretical foundation of the relationship between finance and development goes back to Adam Smith, who stated that «the trade of the city of Glasgow, doubled in about fifteen years after the first erection of the banks there; and the trade of Scotland has more than quadrupled since the first erection of the two public banks at Edinburgh» (Smith, 1776, p. 315). Moreover, Schumpeter (1911) highlighted the importance of the banking system and financial intermediaries in economic growth and the circumstances when financial markets could stimulate capital accumulation and future growth through funding innovations and productive investments. Besides, Robinson (1952) suggested that, as the real economy grew, more financial services and institutions arose to satisfy the demand for financial assistance. Namely, financial development follows economic growth.
However, a clear theoretical framework for the financial liberalization thesis lacked until the publications of McKinnon (1973) and Shaw (1973), which provided a concrete theoretical framework to the link between financial liberalization and economic growth. According to the McKinnon and Shaw thesis, higher interest rates, resulting from financial liberalization policies, induce households to increase their savings. On the one hand, these policies encourage and boost the financial intermediation process and, on the other hand, they accelerate the supply of loanable funds available to the private sector. In turn, this has a positive impact on the level of investment, the efficient allocation of capital resources, and economic growth.
The positive ties between the level of financial infrastructure and economic development have been widely recognized in the pioneering works of Gurley and Shaw, Schumpeter, Goldsmith, Patrick, Greenwood and Javanovic, Bencivenge and Smith, Diamond and Dybvig, Prescott and Boyd, and Sussman and Zeira. As Mark Gertler (1988) aptly observes, the theoretical literature's salient feature is that 'the theoretical models developed thus far are highly stylized and capable of generating only qualitative prediction.
Furthermore, Schumpeter (1911) highlighted the importance of the banking system and financial intermediaries in economic growth and the circumstances when financial markets could stimulate capital accumulation and future growth through funding innovations and productive investments. Besides, Robinson (1952) suggested that more financial services and institutions arose to satisfy financial assistance demand as the real economy grew. Namely, financial development follows economic growth.
The present study analyzes the implications of financial structure for a country's economic development. In the era of globalization, economists, businesses, and entrepreneurs have paid considerable attention is the impact of the financial system on a country's economic growth. However, there is a lack of empirical studies on this issue in Afghanistan, primarily to assess the relationship between the financial system structure and economic development in the context of Afghanistan. The questions will raise here, what is the relationship between a country's financial design and its economic growth? And how do a country's financial structure and economic development relate to the extent of its participation in the global economy? In particular, is there a relationship between domestic financial structure and involvement in international capital markets? Few would doubt that countries with highly developed financial systems might well export capital to other countries. But are there conditions under which having such a system might also promote imports of capital? Therefore, the current study will examine the practical link between the financial structure and economic development.
The investigation of the relation between the structure of the financial system and economic growth is also essential from a public policy makers' perspective. The systematic review of literature results could suggest what type of financial system structure should be stimulated by policymakers because it is essential for long-term economic growth and development.
Statement of the problem
The financial structure is the engine house that drives an economy's productive activity. It performs the vital role of intermediation, provider of payment services, and helps governments carry out monetary policy. The financial sector has long been identified as instrumental to the development of any economy. Financial structure and economic growth reinforce each other, and without a sound financial system, economic growth would not achieve.
Afghanistan has received a considerable amount of foreign aid from multilateral agencies and donor countries to build up its financial system and boost economic growth. It seems that the financial system in Afghanistan stalled poor, and economic growth had remained bedeviled in the country even though considerable money has been spent to restore the economy.
Significance of the study
Today the financial structure has become inevitable to economic development. Economists have more than enough reasons to explore the financial system's impacts on many aspects of the economy. This includes how the financial system affects economic development. Bearing this in mind, this work provides a comprehensive study on the financial structure- economic development nexus. This study's outcome will benefit the operators of financial institutions, government, people in business, and individuals.
Research methodology
The thesis aims to investigate, from different perspectives, the link between finance and growth. The methodological and analytical approaches used in the idea are drawn from the finance-growth literature. On the one hand, this study assesses and critically analyses the literature on finance and growth. Furthermore, the study utilizes some descriptive analysis to investigate the development of Afghanistan's financial system during the period of securitization. In sum, this study will rely on secondary data collection, including books, journals, international organization reports, government reports, and other related issues, which would be the primary source of data collection. Besides, the relevant data will be collected from national and international statistical agencies.
Conclusion
This study will be most significant to the banking sector; the need for a consistent, transparent, and fair policy for all the sector players will be revealed. The study is also significant to the government. It will help the government drive for fiscal adjustment and the development of more flexible financing options. Besides, the study will remain a valid reference document for all students and researchers researching the same or similar topic.
References:
- Abu-Bader, S. and Abu-Qarn, A. M. (2008). ―Financial development and economic growth: empirical evidence from MENA countries. Review of Development Economics 12. 803–817.
- Bencivenga, V.R. and Smith, B.D. (1991). ―Financial Intermediation and Endogenous Growth. Review of Economic Studies, 58, pp. 195–209
- Blackburn, K. and V. T. Y. Hung (1998), ―A Theory of Growth, Financial Development, and Trade, Economica, 65: 107–24.
- Boyd, J. H., and B. D. Smith (1992), ―Intermediation and the Equilibrium Allocation of Investment Capital: Implications for Economic Development, Journal of Monetary Economics, 30: 409–432.
- Demirguc-Kunt A., and Detragiache, E. 1999. “Financial Liberalization and Financial
