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Abstract
An extensive literature has identified financial sector development as a critical factor in inclusive economic development (see Levine, 2005, and Beck, 2009, for overviews). Countries with deeper financial systems grow faster, and it is the lowest income quintile that benefits most from this deepening (Beck, Levine, and Loayza, 2000; Beck, Demirgüç -Kunt, and Levine, 2007). Countries with deeper financial systems also experience faster reductions in income inequality and poverty rates. Financial sector development helps industries that are most reliant on external finance grow faster, and it helps enterprises, especially smaller and more opaque ones, overcome financing constraints (Rajan and Zingales, 1998; Beck, Demirgüç-Kunt, and Maksimovic, 2005). The positive effect of financial sector development on economic growth comes through improved resource allocation and productivity growth, rather than increased capital accumulation (Beck, Levine, and Loayza, 2000; Wurgler, 2000).
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