Financial Sector Development and Economic Growth in Sub-Saharan Africa: A Dynamic Pool Mean Group Approach

Abstract

This study examines the effect of financial sector development on economic growth in sub-Saharan African countries using the dynamic pooled mean group estimation approach. The sample comprises six countries; Ghana, Kenya, Mauritius, Namibia, Nigeria and South Africa, while the time-series dimension of the data covers from 1995 to 2019. Our results generally suggest that financial sector development is an important factor for economic growth. However, while financial sector development affects economic growth through money supply in the short run, its long-run impact occurs through stock market performance, gross fixed capital formation and domestic savings. Increase in both credit to private sector ratio to GDP and government expenditure ratio to GDP has no effect on growth in both the short run and long run. Our results show that the selected sub-Saharan economies would converge to their long run equilibrium levels after suffering a shock. Therefore, our results support the view expressed many authors that the impact of financial development on growth depends on how the former is measured.