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ojects, funding guarantee generates the tendency for managers to under-report the quality of project for the purpose of lowering the level of production. Therefore, management’s pervasive desire for perks and benefits is one of the main sources of the moral hazard.

LINKAGE BETWEEN FINANCE AND ECONOMIC GROWTH

Banks have always been regarded as extremely crucial organs of the financial system that specializes in reconciling the financial needs of savers and borrowers in the economy. In the traditional banking approach, banks pool deposits from savers or depositors and channel these resources to borrowers or investors through the financial intermediation mechanism. According to Beck, Levine and Loayza (2000), the banking sector acts as an intermediary bridge that connects borrowers and lenders to ensure optimal allocation of resources within the economy. Financial institutions are therefore vital economic agents that enhance efficient allocation of funds within the economy.

There is a substantial body of empirical research which provides supportive evidences on the positive relationship between the financial system’s development and economic growth. Bagehot (1873) suggested that if the financial system works efficiently, a nation’s economy will grow rapidly. King and Levine (1993) carried out cross-country empirical investigations which confirmed that the banking system is one of the most prominent accelerators of economic growth. Compiling firm-level and industry-level data across many nations, development policy makers and researchers at the World Bank sought to have a deeper understanding on the relationship between economic development and finance.

Levine at el. (1998) empirically tested the existence of a positive correlation between efficient financial development and economic growth. Maksimovic and Demirguc-Kunt (1998) used a financial planning model and firm level data to empirically conclude that the banking system provides firms with the financial reservoir they need to grow rapidly.

Small manufacturing, entrepreneurial firms and industries are heavily dependent on the banking sector loanable funds to expand their production scale through the implementation of efficient and costly technology. This in turn helps promote market efficiency through economies of scales, and creates substantial employment opportunities and boosts economic growth, Levine (2005).

Levine (2005) contends that financial institutions affect the allocation of resources and ease market conflicts over different sectors and industries within the economy. Levine (2005) further mentioned five main financial institution’s functions which are necessary for economic growth. Those include: the production of information which drives investments decisions, the allocation of capital decisions, the monitoring of investments, diversification and management of risks, the traditional mobilization of savings, and the financing of international trades. Additionally, the empirical side of his studies demonstrated the strong link between financial deepening and economic growth; see: Chart I.

Pagano, (1993) and Thiel, (2001) have classified three key contributions of financial intermediaries to economic growth. Firstly, the leakage of resources from depositors to investors is reduced by an efficient banking system. Secondly, intermediaries enhance fund allocation since banks d