Impact of Financial Sector on Economic Growth: Evidence from Kosovo

Abstract

Financial sector is world-wide considered the core component of the economic growth (Greenwood, 2013). This paper aims to present the impact of financial sector on economic growth in Kosovo, during the period 2008 until 2014. The main theoretical arguments for discussion and analysis are focused on the problems and challenges of financial sector in Kosovo under former Yugoslavia, the main process of establishment of financial sector in Kosovo in post war period, overall structure of financial sector in Kosovo, the effect of financial global crisis on financial sector particularly on foreign capital / investors in banking system and other factors that have impacted reduction of the annual rate of financial sector in 2010 and 2011. In the methodology of this research are used secondary data, which are calculating through STATA program and as the main analyses in the paper are descriptive statistic, OLS method and correlation matrix. The results of analyses have shown that financial sector has positive impact and positive correlation with Kosovo's economic growth, inflation rate has positive impact and positive significance on economic growth and exchange rate has negative impact and non - significance in economic growth in the period 2008 - 2014. As a result the research concludes that financial sector should play a crucial role in Kosovo's economy because its participation in GDP is too high (together with FDI and remittance they participate about 60 % of Kosovo's GDP). Regardless of decrease of financial sector in last few years (it is as result of reflection of global crisis in Kosovo), it is very important for the financial sector to continue to increase further its participation in overall economy of Kosovo

DOI: 10.5901/mjss.2015.v6n6s4p315