Savings is one of the driving factors of economic development. Though Bangladesh economy started its financial system with control over interest rate, directed credit market, complex rules for money, capital markets and over-valued exchange rates. Later the financial liberalization initiative in 1982 and Financial Sector Reform Project (FSRP) in 1990 have been undertaken. This paper aims to estimate financial savings function that would exhibit the savings response to these initiatives. Simultaneous equation model was run to estimate the financial saving function as there exists simultaneity between financial savings and economic growth. Data were collected from secondary sources for the period of the year 1976/1977 to 2005/2006. Empirical results show that the economic growth and number of branches of scheduled banks have positive impact on savings rate though it is statistically insignificant, while the real rate of interest and financial liberalization exerts a statistically significant positive impact on financial savings. Growth function with low explanatory power, however, captures the effect of financial savings rate, foreign direct investment (FDI) inflow and adult literacy rate. This study finally suggests increasing the number of scheduled bank branches, extending the bank services in rural sides, liberalizing interest rates and reducing government intervention in the financial market to foster financial savings and economic growth.
Keywords: Financial Savings, Economic growth, Bangladesh