The nexus between financial development and economic growth has been the subject of considerable debate. There are two important competing views on the relationship between finance and growth. According to the first view, prevalent in the early 19th century, enterprise leads and finance follows, implying that the financial system does not have a leading role in growth. In contrast, the other view stresses on the complementarities between development and capital formation, particularly the role of banks in financing investment in physical capital and growth. An early study by Schumpeter (1911) highlighted the importance of financial intermediaries in mobilizing savings, evaluating projects, diversifying risks, monitoring the management of firms in debt, and facilitating transactions which are essential for innovation and economic growth. Since Schumpeter put forward his view, a considerable amount of theoretical and empirical literature has emerged. The notable early works on finance and development along the Schumpeterian lines include Gurley and Shaw (1955), Goldsmith (1969), and Hicks (1969). These studies argue that the development of a financial system is crucially important in stimulating economic growth and underdeveloped financial systems retard economic growth.

In contrast to Schumpeter's view, the prevalent view held by many economists in the 19th century endorsed Robinson's (1952) famous proposition that ‘where enterprise leads, finance follows’, suggesting a passive view that as opportunities arise in an economy that needs financing, the economy develops the necessary markets and institutions to finance these opportunities. In a different approach, Tobin (1965), based on the theoretical works of Keynes (1936), argued for financial repression by keeping the interest rate artificially low through government interventions. However, McKinnon (1974) and Shaw (1974) eventually challenged the paradigm of financial repression, emphasizing the complementarities between financial development and capital accumulation, and highlighted the distorting effects of financial repression in developing economies. They further argued that financial repression due to widespread government intervention in credit markets is often growth-reducing. Their approach, however, found only mixed empirical support and failed to explain the sustained increases in the growth rate of many economies.

Further, in the early 1980s, neo-structuralists (Taylor, 1983; Van Wijnbergen, 1982, 1983a, 1983b) criticized the McKinnon-Shaw school and predicted that financial liberalization slows down growth.