Abstract
The search for financial development’s transmission channel to growth has always been updated in the literature. While there has not been a consensus on this matter, empirical findings on finance-growth nexus have been ambiguous. Relying on this, we investigate its bank development transmission channel to growth in a panel of twenty-eight Sub-Saharan Africa (SSA) countries from 2000-2016. Having adopted the augmented Solow (1956) and Mankiw et al. (1992) growth model, the fixed effect and dynamic system GMM estimation techniques reveals a negative non-significant and positive significant direct impact of finance on growth in the static and dynamic models respectively, thereby suggesting institutional (dynamic) factors that can spur finance. Secondly, the non-linear effects of bank development had a direct positive significant impact on growth and its marginal-effects before and after the financial crisis of 2007/08 were relatively stable. This implies that banks in SSA were relatively stable in financial intermediation; therefore SSA countries need to reinforce and improve its banking policy through FinTechs adoption. Finally, the interaction between bank development and financial development significantly increase steady-state growth. This implies that SSA economies can promote steady-state growth from financial development only when a threshold of bank development is reached.
Highlights
There are a number of studies that links financial development to growth without a clear transmission mechanism through which finance can impact growth (World Bank Report 2013:32). Levine (1998) added that it is less clear how exactly finance influences economic growth
The results of the findings further reveal inconsistent and ambiguous conclusions; while some authors like Hondroyiannis et al (2005), Huang and Lin (2009) and Durusu-Ciftci, et al (2017) found evidence to justify financial development positive impact on growth; a negative nexus between finance and growth were found by others such as Luintel and Khan (1999) on seven countries among the ten countries used in their samples; by Gregorio and Guidotti (1992) when the sample is restricted to the Latin American countries; and Sassi & Goaied (2013) among MENA countries
After which a standard growth model as specified in equation 1 above will be estimated to show how financial development and banking sector development individual impacts growth. This is followed by a non-linear growth model to account for the long run effect of banking sector development on growth as this will measure to what extent will increased bank development will get to before it begins to accelerate or hamper growth among Sub-Saharan Africa; and the analysis will estimate the interactive impact of financial development and bank development as a transmission channel to growth
Summary
There are a number of studies that links financial development to growth without a clear transmission mechanism through which finance can impact growth (World Bank Report 2013:32). Levine (1998) added that it is less clear how exactly finance influences economic growth. There has been quite a number of works in this area, ‘the literature rarely attempt to identify the particular mechanism through which finance-growth nexus emerges’ (Arestis, Chortareas, and Desli 2006) Given this dichotomy, the results of the findings further reveal inconsistent and ambiguous conclusions; while some authors like Hondroyiannis et al (2005), Huang and Lin (2009) and Durusu-Ciftci, et al (2017) found evidence to justify financial development positive impact on growth; a negative nexus between finance and growth were found by others such as Luintel and Khan (1999) on seven countries among the ten countries used in their samples; by Gregorio and Guidotti (1992) when the sample is restricted to the Latin American countries; and Sassi & Goaied (2013) among MENA countries. This further stresses the need for an efficient banking sector for the purpose of intermediation
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