International Journal of Social Sciences Perspectives ISSN: 2577-7750 Vol. 10, No. 2, pp. 43-60. 2022 DOI: 10.33094/ijssp.v10i2.598 © 2022 by the authors; licensee Online Academic Press, USA 43 © 2022 by the authors; licensee Online Academic Press, USA The Relationship between Domestic Credit, Financial Development and Economic Growth in the Gambia Ismaila Y Jammeh Department of Economics, Management and Industrial Engineering, University of Aveiro, Aveiro, Portugal. Email: isma.jammeh@ua.pt Licensed: This work is licensed under a Creative Commons Attribution 4.0 License. Keywords: Domestic credit Financial development Economic growth VAR The Gambia. Received: 5 May 2022 Revised: 17 June 2022 Accepted: 30 June 2022 Published: 14 July 2022 Abstract This study examines the relationship between domestic credit availability to the private sector, financial development and economic growth in the Gambia from 1967 to 2020. Financial development has been a crucial driver of economic growth by channelling funds from those with financial resources, who lack the business investment ideas to those with investment decisions but lack the resources to kick start their investment ideas. The development of this sector will not only promote economic growth but will create confidence for lenders in providing funds to investors and these funds will be monitored to ensure they’re used in productive projects to prevent defaults and financial crises. The study employed a VAR analysis to examine the relationship between these variables. However, given the lack of data on financial development, the ratio of broad money to GDP and the ratio of domestic credit to the private sector to GDP was used as a measure of financial development. The result shows that financial development has a direct impact on the changing amount of domestic credit available for the private sector. Although the availability of domestic credit to the private sector has little impact on economic growth, this seemingly small impact will significantly improve further economic growth in the Gambia. Therefore, policymakers should put more effort into developing and improving the credibility of the financial sectors in the Gambia which will create confidence in lenders and thus monitor the activities of credit borrowers if those credits are used productively. Funding: This study received no specific financial support. Competing Interests: The author declares that there are no conflicts of interest in publishing this article. 1. Introduction Financial development has been a fundamental driver of modern economic growth and development and a crucial factor in minimizing corruption and embezzlement. The role financial development plays in international trade and channelling funds from lenders to investors cannot be ignored. The catastrophic impact of the global financial crisis revealed that weak financial development can be detrimental to sectoral performance and economic growth. This catastrophic event also illustrated that financial development goes beyond having numerous financial intermediaries and infrastructure. In addition, it is crucial to have robust policies in place for supervision and regulation of the financial sector and investment decisions of borrowers. According to the World Bank (2012) the financial sector is comprised of a set of institutions, markets and regulatory frameworks which reduces costs in the financial system by facilitating transactions. Reducing the cost of transactions in this sector will provide information, monitor investments and make trading easier, efficient and encourage savings. Financial development promotes economic growth by channelling savings to investors who have business ideas but lack the funds to implement those ideas or expand their existing businesses. Without the appropriate funds, some of the basic benefits of business, including employment opportunities, capital accumulation and technological progress may not be possible. Another benefit of the development of the financial sector is the inflows of foreign investment. This benefit has great potential to alleviate poverty and reduce inequality by providing access to finance enterprises which has a crucial role in economic development in emerging economies (World Bank, 2012). Sipahutar, Oktaviani, Siregar, and Juanda (2016) also support the view that credit provided by banks and other financial institutions has a positive correlation with productivity and capital per worker. It was also stated