Inflation and financial sector development in Sub-Saharan African countries

Abstract

PurposeThe purpose of this paper is to examine the link between inflation and the financial sector performance in Sub-Saharan African (SSA) countries.Design/methodology/approachThe study analyzes the relationship between inflation and the financial sector performance for selected 22 Sub-Saharan countries from 1980 to 2013. The study used panel data and the dynamic panel generalized method of moments econometric method. The study concentrates on the link between inflation and the development of the banking sector.FindingsThe findings suggest that inflation does not promote financial sector development in SSA region while trade openness has a positive impact on the selected financial development indicators. Other variables that enhance financial development in SSA include government expenditure and good governance.Practical implicationsThe main policy implication of the study is that in order for SSA countries to benefit from a deeper and more active financial sectors, the rates of inflation must be maintained low and be consistently under control. Also, for SSA region financial sectors to become deeper and more active it is crucial to develop stronger economic institutions including independent central banks and sound fiscal authorities.Originality/valueThe study differs from previous studies as it includes more (22) countries from SSA region while previous studies were either regional or country specific. The study also incorporates trade openness and the role of institutional quality in enhancing financial development. This differentiates the study from previous studies on the subject from the region.