Over the last few decades, there have been extensive theoretical and empirical debates on the relationship between finance and growth. Previous studies stressed the role of finance as a key determinant of the technological innovation process and its positive impact on economic growth. In particular, Schumpeter’s growth theory highlighted the importance of the banking system and financial intermediaries in promoting economic growth. Another strand of the literature supported the financial liberalisation theory developed by McKinnon and Shaw, according to which financial liberalization policies, would induce households to increase their savings. However, empirical results are ambiguous and vary according to the measures of financial development; estimation method; and data frequency. Furthermore, channels through which financial development affects economic growth are not well understood and examined.
Against this backdrop, this chapter examines the relationship between financial development, financial liberalisation policies, and economic growth in the case of Egypt. The first section of the chapter discusses the evolution of the Egyptian financial sector and the main financial policies adopted over the period from 1980 to 2019. The second part empirically investigates the relationship between financial development, financial liberalisation policies and economic growth whereas the third section examines potential channels through which financial development influences economic growth.