Financial Development and Economic Growth in the Southern African Development Community (SADC)

Abstract

Studies on the finance-growth nexus span across generations. However, few researchers attempted studies on finance-growth in the Southern African Development Community (SADC) as a region. The existing studies do not consider the effect of financial reforms or the causality between finance and growth for SADC. The shift from wholesale to retail finance in support of small enterprises and increasing financial inclusion and financial innovation in the region justifies the need for a relook at the finance-growth nexus. This study seeks to establish the causal relationship between financial development and economic growth in the SADC region, factoring-in the role of financial reforms. Utilising Generalised Methods of Moments (GMM) Estimations and Panel OLS Estimation with Fixed and Random Effects, the study established that financial development has a negative effect on growth in SADC. Country heterogeneity, underdeveloped financial systems, non-performing loans, structure and distribution of credit in the SADC countries are influencing the relationship. A bi-directional causality between finance and growth was established, although demand-following causality proved to be stronger than the supply-leading causality. Addressing underlying structural issues in both the financial sector and overall macro economy of SADC countries may help in improving the relationship between finance and growth in the region.