Impact of financial development in economic growth of nepal

Abstract

This study investigates the relationship between economic growth and financial development in Nepal using comprehensive data from the Ministry of Finance (MOF) and Nepal Rastra Bank (NRB) spanning from 1975 to 2022. It focuses on evaluating key financial indicators and their impact on economic growth through rigorous econometric analysis. Unit root test was employed to examine the stationary of the variables used in the study. The study employed ARDL regression model to examine the impact of financial development on economic growth of Nepal. Residual and diagnostic test were employed to examine whether the regression fits properly or not. The study showed that number of the financial institutions have been continuously decreasing in Nepal due to policy of merger and acquisition of banking and financial institutions in Nepal introduced by Nepal Rastra Bank. In contrast, the number of Microfinance Institutions (MFIs) has grown substantially from 21 to 90, highlighting their pivotal role in enhancing financial inclusion. The expansion of Commercial Bank branches across Nepal, particularly in Bagmati Province, reflects robust infrastructure development in key economic regions. Analysis of financial indicators reveals that Domestic credit provided by BFIs reached NPR 616,891 million in 2023, equivalent to 115% of Nepal's GDP, underscoring the financial sector's crucial role in supporting economic activities and growth. The econometric results showed that gross fixed capital formation has positive impact on economic growth of Nepal indicating that increases in capital formation significantly boost economic growth. Similarly, export has a positive impact, highlighting the role of export-oriented strategies in driving economic expansion. Conversely, foreign aid exhibits a negative relationship with economic growth while, domestic credit disbursed by the banking institutions have no impact on economic growth of Nepal. It is recommended to utilize the domestic credit in productive sector rather than the unproductive sector.