An Empirical Study of the Determinants of Banking Sector Development in the SADC Countries

Abstract

This paper explored the determinants of banking sector development in Southern African Development Community (SADC) countries using the dynamic generalised methods of moments (GMM) estimation technique with panel balanced data ranging from 1994 to 2014. The major advantage of the GMM approach is its ability to capture the dynamic characteristic of banking sector development data and address the endogeneity problem. The impact of banking sector on economic growth has been investigated by several researchers and their findings show consensus with regard to the direction of causality between the two variables. What is still unclear or not yet agreeable is what determines banking sector development. Although few studies attempted to address that question, they overlooked the SADC region, a grouping of countries which over the last two decades relied on savings mobilization and allocative efficiency ability of the banking sector to influence economic growth. The current study contributes to literature because no similar study has been done on SADC countries to the best of the author’s knowledge. Few similar studies as shown by literature have used a single country as a unit of analysis, which is not very useful to SADC for regional banking sector policy formulation. Apart from not having focused on SADC countries, previous studies on banking sector development determinants ignored the dynamic aspect of banking sector development data and the endogeneity problem. This paper addressed all the shortcomings. The findings of this study are: (1) The lag of banking sector development and GDP positively and significantly influenced banking sector development in line with theoretical predictions. Trade openness negatively and significantly impacted on banking sector development whilst inflation had a marginal positive impact on banking sector development in SADC countries. Government consumption and unemployment had a negative but insignificant effect on banking sector development. These results are supported by literature. The implication of the study is that SADC countries should implement economic growth enhancement policies in order to increase the development of their banking sectors. They are also urged to reduce government final consumption expenditure, trade openness and unemployment levels in order to enhance banking sector development.