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anies they invest in.

On the other hand, the term 'economic development' is generally used in many other synonymous terms such as economic growth, economic welfare, secular change, social justice and economic progress. According to Meier and Baldwin (1960), economic development is a process whereby an economy's real national income increases over a long period of time. In other word, it is continuous process which has to be extended over a long period of time so as to break the vicious circle of poverty and lead a country to a stage of self-sustaining growth or to self-generating economy.

Importance of Stock Markets and Banks

Mishkin and Eakins (2011) stated financial markets are critical for producing an efficient allocation of capital, allowing funds to move from people who lack productive investment opportunities to people who have them. Hence, banks provide a place where individuals and businesses can invest their funds to earn interest with a minimum of risk and stock market is a part of financial markets where these markets channel funds from savers to investors, thereby promoting economic efficiency. Market activity affects personal wealth, the behavior of business firms, and economy as a whole. Well functioning financial markets, such as the bond market, stock market, and foreign exchange market, are key factors in producing high economic growth. Therefore, declining stock market prices signal an economic recession. Conversely, a increasing of the stock prices points to a steady and uplifted recovery of the economy. When stock prices reach an all-time high, it shows that the economy is tremendously healthy and business booming as well as enhances the economic development.

Stock Market and Economic Development

Stock market and economic development give a divergence views when it comes to the specific role in promoting economic growth. Previous research has emphasized the role of the banking sector and its contribution towards economic growth, however in recent years, world stock markets have surged with emerging markets gaining an ever increasing influence in the global market place Demirguc-Kunt and Levine (1996).

Theoretical Literature

Study by Schumpeter (1912) who emphasizes the positive influence of the development of a country’s financial sector on the level and the rate of growth and argues how necessary for economic growth are the services that financial sector provides – of reallocating capital to the highest value use without substantial risk of loss through moral hazard, adverse selection or transactions costs.

Demirguc-Kunt and Levine (1996) found that most of the stock market indicators are highly correlated with banking sector development while most of the well-developed stock markets tend to have well-developed banking sectors. In addition, Demirguc-Kunt and Maksimovic (1996) show that firms in countries with better-functioning banks and equity markets grow faster than predicted by individual firm characteristics. Accordingly, the stock prices should reflect various macroeconomic variables to indicate current economic development. If stock prices are able to reflect all the macroeconomic variables, then it should be a good predictive tool for future bank lending activities as the stock market indicators are the macroeconomic variables that determine bank lending Yartey (2008).

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