The impact of financial regulation on economic growth in developing countries

Abstract

Financial regulation is a topical; issue particularly its potential negative impact on economic growth. Literature indicates that researchers have divided opinions on the subject. There is a group that believes higher financial regulation will deter economic growth and another group that believes that current financial regulations should be increased. The aim of the study was to investigate the impact of financial regulation on economic growth in developing countries.The study was undertaken by formulating one overall research question, which was supported by two hypotheses. The study employed quantitative methodology to analyse the data. Secondary data was collected on a sample of ten developing countries in three regions (Africa, Americas and Asia Pacific). Time series data was obtained on the following variables: gross domestic products, inflation rate, interest rate, unemployment rate and financial freedom index. The data was initially analysed using trend analysis, which was followed by regression analysis. Trend analysis indicates that financial regulation is good for economic growth in developing countries. Financial regulation was measured by the financial freedom index and economic growth was measured by growth in gross domestic products.The results show a negative correlation between the two variables. When strict financial regulations are imposed, growth in gross domestic product increases. This relationship was tested statistically to quantify the percentage of change in gross domestic product attributable to financial regulation as well as its significance. It was discovered that financial regulation on its own can explain up to 17.8% of the change in gross domestic product and is a very significant explanatory variable.