Institutional structures and financial market development in Africa

Otuo Serebour Agyemang,Abraham Ansong,John Gartchie Gatsi,David Mcmillan

doi:10.1080/23322039.2018.1488342

Otuo Serebour Agyemang, Abraham Ansong + Show 2 more

Open Access

https://doi.org/10.1080/23322039.2018.1488342

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Abstract

Our paper examines the relationship between institutional structures and the level of financial markets development in Africa. Our paper contributes to the extant literature by using other financial market development variables—ease of access to loans and venture capital availability—that have not before been used to analyzed how institutional structures influence the level of financial markets development in the context of Africa. We employ a two-step generalized method of moment estimator with corrected standard errors to examine this. We demonstrate that a high-quality institutional environment is relevant in explaining ease of access to loans and venture capital availability in Africa. Based on these results, our paper argues that good institutional structures could help stimulate the level of financial markets development in Africa. However, to attain this feat, African governments need to strengthen institutions through effective enforcement of laws to foster compliance in a specifically def...

Highlights

Following the work of Gurley and Shaw (1955), the role of an efficient financial sector in pooling domestic savings and mobilising foreign capital for productive investments in an economy to promote economic growth (Bekaert, Erb, Harvey, & Viskanta, 1997; Ngare, Nyamongo, & Misati, 2014) has received an incremental attention recently
This study examined the role of institutional structures in influencing the level of financial market development in Africa
Even though extant related literatures have established the positive relationship between institutional structures and the level of financial market development in economies, most of these studies employed stock market variables as proxies for the level of financial market development

Summary

Introduction

Following the work of Gurley and Shaw (1955), the role of an efficient financial sector in pooling domestic savings and mobilising foreign capital for productive investments in an economy to promote economic growth (Bekaert, Erb, Harvey, & Viskanta, 1997; Ngare, Nyamongo, & Misati, 2014) has received an incremental attention recently. 2. Literature review A nascent and fledging works in the literature has shown that the development of efficient financial sector is dependent on the strength of institutional structures; studies on the effects of country-level governance on the functioning of financial markets (see Demetriades & Fielding, 2009; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997; Porta et al, 1998; Tressel & Detriagiache, 2008). The argument is that economies with weak governance structures (such as political stability, control of corruption, government effectiveness, rule of law, voice and accountability, and regulatory quality), tend to be characterised by weak financial markets, which may preclude highly possible competitors to get access to finance This idea was examined in the work of Roe and Siegel (2009), which pointed out that the role of governance structures, political stability in explaining the level of financial market development is much clearer than legal origin. It is against this backdrop that the present study tend to use other financial market development variables to empirically find out whether the same result can be obtained in the context of African countries

Methodology

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