The Impact Of Financial Development On Economic Growth In Sub-Saharan African Countries

The financial sector performance has been weak in most Sub- Saharan Africa countries since the 1970 s to 2000 s. The region has suffered tremendously from low level of human and physical capital accumulation leading to severe constraint on resources used for development of the financial sector and consequently impacted negatively on financial sector stability and hence economic growth.Given the relevance of finance on growth, this study examines the impact of financial development on the economic growth in Sample of 32 countries in Sub-Saharan Africa in the event of human capital development, corruption environment and the financial reform process based on available information.The study furthers classified the countries into four categories, namely; Economic Community of Central Africa States, Southern African Development Community, Economic Community of West Africa States and East African Countries. The data set is obtained from International Financial Statistics(IFS), World Development Indicators(WDI) and the World Bank(WB) Data Base from 1985 to 2012 on financial and growth indicators such as the financial depth-broad money(M2), the level of financial intermediation-liquid liabilities(M3), credit to the private sector by banks(CPB), human capital(H), physical capital(K), gross national savings(GNS), population growth rate(PGR), and GDP Growth on an annual basis.In the estimation procedure, summary statistics, correlation, panel evidence with the fixed effects, random effects and dynamic models estimates are applied in the study. In order to determine the time series property of the data, the Augmented Dickey Fuller(ADF) and the Philip-Perron tests are also performed.Results from the summary statistics indicate a sharp contrast of credit supply to the private sector by banks in the Western part of Africa compared to the other regions of the sample of SSA countries. This may reveal that substantial credit goes to the public sector, an idea of crowding out of the private sector investment in the development process and thus demonstrates the underdeveloped nature of financial intermediation in the Western part of SSA countries.The results also reveal weak level of gross national savings; this may implies that high proportion of income is spent on consumption rather than saving mobilization for productive investment and thus impact negatively on long run economic growth in the region.Results from the correlation matrix further indicate a positive relationship between GDP growth and all the independents variables for the entire sample of SSA countries as well as the four classified groups of countries, though weak. However, investment in physical capital(K) has fairly strong positive correlation(0.626) with GDP growth for Economic Community of Central Africa States. The result further reveals no serious case of multicollinearity for the entire sample of SSA countries and the regional grouping as there seems to be no significant correlation amongst the explanatory variables with no correlation value equal to 0.7(70%).In terms of the dynamic panel growth regression, the role of finance and human capital on economic growth is mixed in the SSA region including the four regional grouping, with one group doing better in the financial indicators and other groups doing the reverse. However, the simultaneous interaction of financial development indicators and human capital improvement, all the financial development indicators impact positively and significant for all the four regions including the entire sample of SSA countries.The results further show that corruption and inflation are bad for growth in the sample of the 8 selected countries from SSA region. The variable representing the financial reform process although enters the growth equation positively but weak. This implies that the relatively high inflation rate observed in the study is suggestive of some form of macroeconomic instability which may have undermined the efficacy of financial sector reforms in these countries. Thus, the negative relationship between inflation and GDP growth may have rendered the financial sector reforms ineffective and may further triggers unstable macroeconomic climate as well as inappropriate sequencing of the order of financial reforms in these countries.This result may not be surprising because, many studies have shown that financial reforms can only induce growth significantly if the macroeconomic conditions of the country are sound during the reform period. An unstable macroeconomic environment that is characterized by high inflation rate may generally militate against the efficacy of financial reforms and hence hampering the growth process. Apart from macroeconomic stability, appropriate sequencing of financial reforms is also very important for enhancing the desired growth inducing effects of the reform program. In the light of the above, it could be the case that for those countries where financial reforms impact positively, but weak on growth, the macroeconomic environment is either unstable or there is no proper sequencing of financial reforms.There exists negative correlation between corruption and GDP growth, indicating that high corruption will reduce growth of output, this is not surprising, growth profile in many Sub-Saharan African countries are weak and the cause of the weak growth may be attributed to the level of corruption environment in the region. Furthermore, corruption is likely to negatively affect physical and human capital and/or lower their quality. The simultaneous interaction of the financial reform variable and corruption reduces the growth of GDP in the selected SSA countries. Therefore, African governments should strive to attain sound macroeconomic environment, mitigating corruption and creating enabling environment for employment opportunities to ensure sound economic growth and hence poverty reduction.The policy implication is that if the region is to get sound financial sector infrastructure, growth policy should be emphasized. In an economy with poor savings, the real and financial sector tends to have a negative relationship. Therefore, the African region should strive to attain sound macroeconomic and financial stability. There is evidence of stationary of the data at first difference, which means that the regressions are not spurious. The results of the robustness checks reveal that the instruments used in the study are appropriate and fit the regression model as evidenced by the co-efficient of determination;(R-squared values), being reasonable, and determined the extent by which the regression model is explained.Primary weakness of the study is the limited availability of data; analysis is therefore, restricted to a smaller number of variables than desired because of these restrictions. However, reasonable data is available for the purpose of this research. Despite this limitation, this study contributes to current literature by providing an econometric understanding of relationship in finance, human capital and economic growth for SSA countries. This understanding is important for academics, policy makers and development organizations in shaping the future financial sector infrastructure, human capital and economic growth in the SSA region and globally.