A careful analysis of the literature on financial economics will expose a very interesting and topical issue concerning the connection between the development of the financial sector and economic advancement. Very often captioned in the literature with such expressions as “finance-growth nexus” or “growth-finance nexus”, these two expressions reflect a cluster of opposed schools of thoughts, ideas, and theories regarding the exact nature of the dynamic synchronicity between finance and economic growth. Although there is no universal consensus on the exact nature of the relationship between finance and growth, there are four major competing theories or schools of thought to consider whenever the analysis is conducted on the relationship between financial growth and economic development. These theories are the “finance-led growth theory”, “growth- led finance theory”, “mutual feedback/ impact theory” and “no-causal relationship theory”.
The first theory (finance-led growth theory) was initially promulgated by Schumpeter (1911) [110] and subsequently developed by Goldsmith (1969) [45], McKinnon (1973) [85], and Levine (1997) [76]. However, Demirguc-Kunt (2006) [34], inspired by the initial works of Schumpeter (1911) [110], Goldsmith (1969) [45], McKinnon (1973) [85] and Levine (1997) [76] extended the theory by positing a well-working financial framework as one of the key underpinnings of sustainable economic growth. He contended that advancements in the financial industry was a critical precursor to economic growth and further asserted that finance influences development by stimulating technological innovation, savings, and investment (Demirguc-Kunt, 2006) [36]. In essence, therefore, the finance-led growth perspective argues that critical developments and improvements in the financial sector are key drivers of economic growth (Goldsmith, 1969; Levine, 1997; McKinnon, 1973; Schumpeter, 1911). [45, 76, 85, 110]……………………………………
