The Impact of Financial Intermediation on Economic Development in Zambia (1991-2021)

Background: Financial intermediation is the practice of linking an investor and borrower. They function as a third party, an intermediary aiming to meet the financial needs of both parties to mutual satisfaction. Financial intermediaries help consumers and businesses alike by offering services on a larger economy of scale than would otherwise be possible as such financial inter-mediation is very crucial in any economy. A financial intermediary serves two fundamental purposes, which are creating funds and managing the payment systems. Methodology: The study used an ex post facto research design to analyze the effects of financial intermediation on the economic development of Zambia from the data collected from 1991 to 2021. The research empirically investigated the strength and the direction of the relationship between the endogenous components of financial intermediation and economic development in the long run by using the Engle-Granger and Johansen cointegration methodology. Results: The result of the model shows that all the variables, except bank overdrafts, are statistically significant in explaining the impact of the endogenous component of financial intermediation on economic development in Zambia. This is surprising since it is expected that a rise in bank overdrafts will lead to a rise in economic development. As indicated by the result, a unit increase in demand deposits and time savings resulted in about 0.006% and 0.171% increase in real gross domestic product, respectively, in the short run, while a unit increase in loans resulted in about 0.062% reduction in gross domestic product in the short run for the period under consideration (1991 to 2021). Conclusion: Endogenous component of financial intermediation impact positively impacts economic development through demand deposits and time savings and negatively through Loans. There is no evidence of the existence of long-run relationships and directional causal relationship between economic development and endogenous components of financial intermediation. The absence of long-run and directional causal relationships between economic development and endogenous financial intermediation may suggest that short-term macroeconomic volatility, policy inconsistencies, or weak institutional frameworks disrupt the sustained impact of financial variables on growth. Additionally, the financial system may not have been sufficiently