Governance, Financial Development And Economic Growth:Evidence From Africa

Using panel data techniques and data from40African countries over the period2002-2011, the present study explores the importance of governance in the financial development and economic growth relationship. The study starts by presenting the concepts of growth, financial development and governance as well as some earlier important literature on the link between these fields. Afterward, it empirically assesses the impact of governance on finance-growth relationship. Domestic Credit provided by the Banking sector (DCB), Domestic Credit provided to Private sector (DCP), and Liquid Liability (LLY) are used as proxies of financial development; GDP Per Capita is taken to represent economic growth; and Voice and accountability (VA), Government effectiveness (GE), political stability and absence of violence (PC), Regulatory quality (RQ), Rule of law (RL), and Control of corruption (C.C) are variables of governance. Two estimation techniques are used and following results are obtained:with Fixed effect estimation, when financial development variables are used in regression before the interaction with governance indicators the reported coefficients are all negative and only DCB are significant. After the interaction with governance, all coefficients turn to be positive and only coefficients on DCB remain significant even after the interactions. Also significance is observed on interaction between LLY and VA and LLY and C.C. Using the generalized method of moments (GMM) technique, slight changes are observed, where coefficients on DCP, and LLY are now positive but still insignificant. After the interaction between financial development variables and governance all coefficients are positive and significance remains on DCB in interactions. From these results, it is clear that governance is highly needed in the finance-growth stimulation in Africa.