This study investigates the impact of financial structure in economic growth of Nepal. Further, it tries to analyze the role of bank and market in the economic growth of Nepal. The study uses annual time series data from 1960 to 2014 for bank and from 1994 to 2014 for market variables. It has developed a model to capture the interrelationships among aggregate bank variables like money supply growth, bank deposit growth, bank credit growth and bank assets growth and market based variables like market capitalization growth, stock value growth, trading turnover growth and NEPSE growth and economic growth variables like real gross domestic product growth, gross capital formation growth and gross domestic savings growth. The study employs descriptive analysis, correlation analysis, and ordinary least square analysis.
The study finds that financial structure does have impact upon economic growth of Nepal. Furthermore, the study finds that bank based financial structure is dominant in Nepalese financial system and the role of capital market seems to be insignificant. It may be either the size of market is too small to seek the relationship or it is weakly linked to real economic activities. The study is consistent with the earlier findings in other countries and it has two important implications. First, the policy should focus on banking sector development by enhancing its quality and outreach as it promotes economic growth. Second, in line with the banking sector, the scope of capital market should be further expanded to real economic activities to channelize its impact on growth. As far as liberalization is concerned it has played a significant impact on economic growth and financial development of Nepal.
Keywords: Financial Structure, Economic Growth, Money Supply, Bank Deposit, Bank Credit, Bank Assets, Market Capitalization, NEPSE, Market Capitalization, Gross Capital Formation, Gross Domestic Savings, Gross Domestic Product