Does Institutional Quality Influence Financial Deepening In Selected African Countries?

Abstract

This study finds new evidence that institutional quality matters in determining cross-country variation in financial deepening in Africa. Using the system-generalised method of moments (sys-GMM) technique on a sample of 35 African countries from 2005 to 2018, the study finds that: (1) while macroeconomic stability is vital for promoting financial deepening, it is not sufficient. Strong institutional quality, such as good governance systems, play a huge role in fostering financial deepening in African economies, and in determining cross-country variations, and (2) fiscal deficits or widespread financial indiscipline have constrained credit provision in Africa resulting in high cost of borrowing and crowding-out the productive private sector. Therefore, this study concludes that deepening financial markets will require prioritising institutional policy reforms aimed at fostering accountability, sound, and effective financial regulatory frameworks, honour the rule of law, control corruption, and rent-seeking behaviour.