A Study On The Impact Of Financial Development On Economic Growth:Panel Evidence From Sub-Saharan Africa

Conventionally, since 1970 up to 2000s, weak growth episode has been the case in many African countries. On average, the region has been growing at a rate of 3%, which is lower than the growth rate for the East-Asian countries and other advanced developing countries. One fundamental intermediation gap in the Sub-Saharan Africa (SSA) region, is the extremely limited financing for medium to long term lending facilities to promote growth. The financial sector in the region is faced with problems of non-performing loans, weak credit evaluation mechanism and high intermediation cost. The region has been severely affected from excessive over-regulation of the financial systems and thus exhibits some level of inefficiency, illiquidity and thinness which still remains a challenge. Given the importance of financial sector development on economic growth, this study investigates the impact of financial sector development on economic growth in SSA countries,In this study, the general aim is to determine empirically the link between financial sector development and economic growth by specifying appropriate growth equations of the endogenous growth literature to capture the impact of finance on growth.Specifically, the study endeavors to carry out a systematic investigation on:(i) the extent to which financial intermediation has affected growth in Sub-Saharan Africa; (ii) the kind of financial liberalization that has so far been implemented in SSA. The attempt to provide logical explanations on the above issues constitutes major challenges of the current research. Therefore, this study empirically examines these two key issues by applying panel data regression framework approach for the sample of 30 SSA countries which are sub-divided into income groupings (low, middle and upper income countries) to assess the impact of financial intermediation on growth in the region, and to also ascertain whether differences in income levels across countries affect the relative impact of finance on growth. To assess the impact of financial liberalization on growth in the SSA region, a sample of 10 SSA countries is selected based on available information.The first empirical study reveals key findings that are summarized as follows:(i) results from the summary statistics show that the interest rate spread is uncompetitive; (ii) inflation is found to be high-double digit for all the various income grouping including the whole sample of SSA countries; (iii) the results from the causality tests reveal that causation flows purely from growth to financial intermediation for countries like Botswana, Nigeria and Zambia; (iv) On the contrary, countries like Chad, Cote d'lvoire and Mauritania, causation flows purely from financial intermediation to growth; (vii) the study also found bilateral causation between financial intermediation and growth for countries like Burkina Faso, Cameroon, Sierra Leone and South Africa, however, fails to establish any causal effects between financial variables and growth for Senegal, Swaziland and Uganda.In terms of the dynamic panel growth regression, broad money (M2)-the level of financial depth and the level of financial intermediation (M3) reduce growth of per capita income in the low and middle income countries and increases growth in the upper income countries including the entire sample of SSA countries over the period. Credit supply to the private sector (CPB) indicates mixed impact on growth, although it impacts positively on growth for the upper income countries, but found to be insignificant. The results further indicate that credit to the private sector show a significantly negative impact on growth in "middle income" countries and the whole sample of SSA countries. But, it shows a significantly positive impact on per capita growth for the "low income" countries. The interest rate spread (IRS) reduces growth in the entire sample of SSSA region, including the low, middle and upper income countries.The second empirical study examines the effect of financial liberalization on economic growth in the sample of 10 SSA countries with available information. The main findings of this study from the dynamic panel regression are as follows:(?) financial liberalization induces growth in the selected SSA countries, however, the correlation result shows very weak positive relationship between financial liberalization and per capita income; (?) high inflation is observed which may suggest some level of macroeconomic instability and thus constrained the efficacy of the financial liberalization drive in these selected SSA countries; (?) the real exchange rate and openness to trade have significantly positive impacts on growth in the 10 selected SSA countries.The findings of this study have significance contributions to the body of knowledge, practitioners and policy makers. Theoretically, the thesis contributes to existing literature on the impact of financial development on economic growth with particular focus on financial intermediation, financial liberalization on growth. From the practical stand point, for instance, to realize maximum benefits from financial intermediation and financial liberalization, bank practitioners and other financial institutions in the low, middle and upper income SSA countries should strive to set the interest rates spread at a competitive level. This will allow financial intermediaries to mitigate risk of credit default and become more efficient in credit allocations. For the policy perspective, poor performance in both the macroeconomic and financial sector climate could lead to negative ramification on growth. Therefore, it is important for policy maker to understand the factors which are contributing to better financial intermediation and financial liberalization. This will help them to devise appropriate growth policies to enhance sound and stable financial intermediation and liberalization mechanisms in the low, middle and upper income SSA countries. Therefore, policy makers need to be aware of the fact that the increasing the level of financial intermediation and financial liberalization play an important role in determining economic growth. The thesis also has important implications to development organizations that are assisting with the growth process of African countries to shape the future financial sector stability and hence economic growth in the entire SSA region and the world at large.