Relationship between financial deepening and economic growth for selected countries in Africa
Date
2020
Authors
Musiyazviriyo, Tafadzwa
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Abstract
The financial sectors of African countries are still underdeveloped relative to other regions, and there is little academic research on how this can be improved. Given the potential for economic growth, fuelled by further financial sector development, the call is for African policymakers to prioritise financial deepening policies to stimulate economic growth. The purpose of the study was to investigate the relationship between financial deepening and economic growth in 51 African countries. This research sought to achieve three objectives: (i) whether financial depth for the African countries between 1993 and 2017 had a significant impact on economic growth; (ii) whether the effect is positive or negative; and (iii) determining the size of the effect. The assumption was that financial depth in the African countries positively influences economic growth. The study also sought to ascertain whether the direction of causality is unidirectional or bi-directional. This study assumed that the direction of causality is bi-directional.
Using the two-step generalised methods of moments (GMM), the study assessed the relationship between financial deepening and economic growth in 51 African countries from 1993 to 2017. The findings reveal that there is a significant negative relationship between financial deepening and economic growth. The Granger causality tests applied further show that there is a bi-directional relationship between financial deepening and economic growth.
The main conclusion from the study is that there is a multidimensional approach opportunity for African countries to develop their financial sectors further to stimulate economic growth. Possible interventions in policy can be to create an environment that aims to encourage either a demand-following and/or a supply-leading approach to financial sector development. Both strategies will result in financial deepening and may stimulate economic growth since there is a bi-directional relationship between financial deepening and economic growth.
Description
A research project submitted in partial fulfilment of the requirements for the degree of Master of Management in Finance and Investment to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Johannesburg, 2020
Keywords
Financial deepening, Economic growth, GMM, Causality, Africa