Does international integration matter for financial development in Africa?

Abstract

This article analyses the links between international financial and trade integration and financial development in sub-Saharan African (SSA) countries. It is based on a panel data set using methods that tackle slope heterogeneity, cross-sectional dependence and nonstationarity. The results do not point to a general direct robust link between trade and financial integration and financial development in SSA, once we control for other factors such as GDP per capita and inflation. The findings may be due to a number of factors including distortions in domestic financial markets, relatively weak institutions and/or poor financial sector supervision. We find some indication that financial integration is more important for financial development in countries with better institutional quality. Stronger scores in some measures of the quality of banking regulation and supervision are also linked to a positive association between integration and financial development in some of our results. Thus, African policy-makers should be cautious about expectations regarding immediate gains for financial development from greater international integration. Such gains are more likely to occur slowly and through indirect channels.