Informal Sector and Financial Development in Sub-Saharan Africa

Abstract

Since a persistent increase is seen in the size of the informal sector and its continuous coexistence alongside the formal sector and institutional development, this study empirically examines the effect of informal sector size on the financial development in Sub-Saharan Africa for the period 1996-2019. The study represents financial market development by the financial market depth, which is regressed against informal sector size, growth rate of GDP, interest rate, trade openness, and institutional quality index. The study relied on the estimates of the Discroll-Kraay and IV-2LS. Results indicate that informality repressed financial development, while trade openness, growth rate of gross domestic product, interest rate, and institutional quality have a positive impact on financial development. It is therefore recommended for policymakers to reduce the size of informality to improve the financial sector.