Financial Development In Africa Research Articles

Religiosity and financial development in Africa: evidence from panel quantile regression

Religiosity and financial development in Africa: evidence from panel quantile regression

Exchange rate misalignment and financial development in Africa

AbstractWe examine the effect of misaligned exchange rates on financial development in Africa. Results from quantile regression techniques and the IV Lewbel estimator reveal that exchange rate misalignment significantly hampers financial development on that continent. This result is robust across financial institutions and financial markets. We also show that while the effects of misaligned exchange rates are negative on financial institutions and positive on financial markets in African franc‐zone countries, the effects are consistently negative across all financial sectors in the non‐franc‐zone countries there. When robustness assessment is done using quantile regression, the results show that the negative effect of misalignment on financial development is only feasible from the 75th percentile and higher in Africa in general and for the non‐franc‐zone countries in particular.

Shadow economy implications of financial development in Africa: Do income groups also matter?

This study explores the link between financial development and the shadow economy in 45 African economies from 1991 to 2019. While overall financial indices show no clear impact on the shadow economy across the entire sample, a nuanced pattern emerges when considering income groups. In low-income countries, financial institutions' index significantly amplify the shadow economy, whereas in lower middle-income nations, broader financial market measures independently contribute to its expansion. This reveals a heterogeneous relationship between financial development and the shadow economy in Africa, emphasizing the income-specific dynamics influencing these interactions.

The role of international tourism, trade openness and renewable energy in the financial development of selected African countries

It is well established that financial development is pivotal to the proper functioning of the real economy and there is a vast body of literature investigating into its determinants. In this study, we shift attention to tourism and renewable energy consumption that are rarely discussed in the financial development debate along with trade openness. Even though, tourism and renewable energy consumption may be less conventional to issues of financial intermediation, they could, along with trade openness, nonetheless contribute to some aspects of financial development in ways consistent with the finance-growth hypothesis. Consequently, this study, while controlling for economic growth, development assistance and government expenditure examines the effects of renewable energy consumption, tourism development and trade openness on financial development in selected African countries. The study relies on data from the World Bank (2023) World Development Indicators for seven African countries (Egypt, Tunisia, Kenya, South Africa, Zimbabwe, Ivory Coast and Morocco) over the periods 1995–2021. Fully Modified Ordinary Least Square (FMOLS) regression estimations reveal that, in the long run, trade openness, international tourism, and renewable energy stimulate financial development. The quantile regression which rendered additional support to this evidence further reveals that, the financial sector gains associated with trade openness, international tourism and renewable energy are greater for countries with lower financial sector development. Thus, a country can still optimize the gains associated with increased trade openness, international tourism, and renewable energy consumption with a relatively less developed financial market. Hence, polices that improve tourism development, promote renewable energy consumption and intensify economic openness may be important catalysts for stimulating further financial development in Africa.

Exploring the Causal Links of Public Spending on Bank-Based Financial Development in African Economies

This work examined the causal impact of types of government spending on bank-based financial development. It tests the influences of both government productive and non-productive spending on bank-based financial development. Selected 37 African economies between 1980-2018 were sampled. Both the short –run and long –run effects were assessed using either Feasible Generalized Least Squares (FGLS), Mean Group (MG), Pooled Mean Group (PMG) and Dynamic Common Correlated Effects Mean Group (DCCEMG) estimators. Evidences support the hypotheses that both types of spending contribute positively to bank-based financial development. Bank-based financial development is more responsive to non-productive spending than it is to productive spending. Also, confirm the supportive roles of trade openness and GDP per capita, and the detriment of inflation to bank-based financial development. This study comprehensively unearths the impact of government spending on bank-based financial development in Africa by isolating spending into productive and non-productive types. Governments need to promote dual policies that address spending and financial development. They should avoid detrimental spending and promote enhancing spending within each type above. Spending that attract private agents, investments, saving, and liquidity in the financial sector, trade openness, and economic output should be promoted since these enhances bank-based financial development.

Financial development in Africa: Do expenditure and population matter? Evidence through pooled mean group and generalized method of moments estimators

AbstractThis article assesses the impact of government expenditure and population structure on financial development among selected African economies for a panel of 37 selected African economies from years 1980 to 2018. The pooled mean group regression estimator was used, which suitably isolates short run from long run impacts while allowing for heterogeneities and homogeneities for each run respectively. Additionally, generalized method of moments technique was applied for robustness check and allows for dynamism in the estimations. Findings show that financial development is sensitive to both productive and non‐productive government expenditures in the long run. They affirm positive impacts convergences on financial development. Financial development responds only to non‐productive expenditures in the short run. Young and elderly populations do not benefit financial development but mature population does due to its active role in the private sector. Further, it helps support the negative impact of inflation and provides positive impacts of economy openness and individual's economic output. Also, results support short‐run adjustment towards long‐run equilibrium. These results are significant both statistically and economically. Unlike former studies, this work comprehensively disaggregated government expenditure into productive and unproductive types. It isolated population structure age‐wise. In order to stimulate financial development, governments in Africa need to favour policies that stabilize government expenditures, having both short‐run and long‐run foci, encourage public–private partnership and mutually beneficial linkages, devise population policies based on respective age‐structures, and promote economy openness, and growth per capita, and control inflation.

Spatial analysis of carbon emission effect of financial development in Africa: The role of energy and socioeconomic factors

The need to mitigate global warming has led policymakers and other stakeholders to see further understanding of the driving forces behind CO2 emissions. Financial development has been identified among the most influential factors. However, its importance has not been well explored in developing countries, especially in Africa. Several studies have explored the CO2 emissions-effects of financial development in Africa but focused on the temporal aspect and overlooked the spatial dependence which has the potential to influence the estimated marginal effects. In so doing, they consider each country as an island which tends to suggest that there are no spatial spillover effects that could originate from countries’ proximity. In this study, such an inaccurate assumption is relaxed by deploying a spatial Durbin model to explore the spatial dependence in the financial development-CO2 emissions nexus for 52 African countries between 1995 and 2017. Our results reveal a significant positive direct effect (0.020) on financial development in a given country and a significant positive indirect effect (0.074). Thus, our estimated marginal effects show a positive and significant total effect (0.095), indicating that a 1% increase in financial development will result in a net increase of CO2 emissions of about 0.095%. This finding implies that financial development contributes negatively to the surge of CO2 emissions in Africa. While the environmental Kuznets curve hypothesis is validated in the continent, renewable energy utilization is found to posit significant environmental effects. This finding is crucial to policymakers as it stands as a reminder about the role of the neighbourhood in designing and implementing environmentally friendly policies that aim at reducing pollution in Africa.

The effect of ICT on financial sector development in Africa: does regulatory quality matter?

ABSTRACT The moderating role of regulatory quality in the relationship between ICT and financial development in Africa is investigated in this study. We employ data from 38 African countries from 2003 to 2020. For the analysis, a two-step system GMM is used. Our findings demonstrate that ICT and regulatory quality are essential for financial development. The net effect of ICT and regulatory quality on financial development is positive, implying that regulatory quality moderates upwards the nexus between ICT and financial development. On different financial development indicators, ICT improves financial depth and access but deteriorates financial efficiency and stability. The net effects of ICT and regulatory quality are positive for financial depth and efficiency and negative for financial access and stability. It is, therefore, imperative for the government to improve regulatory quality in Africa, given the significance of ICT and regulatory quality in supporting financial development.

The effects of foreign bank presence on financial development in Africa: The role of institutional quality

AbstractDespite the momentous rise in concentration and market share of foreign banks in overall bank assets in Africa, rigorous empirical work(s) examining their effect on financial sector development in Africa is hard to find. In view of this, the study seeks to investigate the moderating role of institutions/governance on the foreign bank presence‐financial development nexus. Employing the two‐step system generalized method of moment for a panel dataset of 28 economies in Africa over the period, 2000–2018, the results show that foreign bank presence has a positive effect on financial development. Also, the study finds evidence that foreign banks in host countries increase financial development in the presence of quality institutions. The study recommends improvement in institutional quality, which will help foreign banks to promote financial development.

Governance Quality and Financial Development in Africa

The study examines the effect of governance quality on financial sector development using an empirical panel dataset from 45 African countries for the period 1996–2018. To this end, four bundled governance quality indicators (i.e., general, political, economic, and institutional) variables are employed. The empirical estimation is based on Quantile Regression and other subsidiary Model. The inspiration for this estimation technique is based on the argument that the effect of governance quality is contingent on the existing level of financial development, and governance – financial development policies, to be effective, need to be tailored differently across countries with low, intermediate and high levels of financial sector development. The general findings are as follows: First, development in governance institutions promotes financial sector development. Second, in most of the cases, the impact of governance quality is higher in terms of magnitude in the upper quantiles of the general, political, economic and institutional governance distributions. Third, the effect of governance institutions is significantly higher in terms of magnitude in the top quantiles of the economic governance distribution. The results remain robust over alternative econometric estimation techniques.

Does financial globalization contribute to financial development in developing countries? Evidence from Africa

This study used panel data from 33 African nations during a period from 2005–2019 to examine the relationship between financial globalization and financial development. Regressions with Driscoll-Kraay and panel-corrected standard errors, which account for cross-sectional dependence, were employed to analyze the link. The main findings of this study reveal the existence of a U-shaped relationship between financial globalization and financial development in Africa, suggesting that a lower level of financial globalization appears to have a negative influence on financial development. However, above a certain point, a growth in financial globalization is accompanied by an increase in financial development. In other words, countries with a lower (higher) level of financial globalization have experienced negative (positive) effects on their financial development. Trade openness, financial freedom, and investment freedom have also been found to be strongly and positively related to financial development in Africa. Based on the findings, African countries are advised to consider the appropriate timing prior to fully opening their capital accounts to international players in order to enjoy the benefits of financial globalization.

Harnessing the synergies of independent central banks and human capital for enhanced financial sector development in Africa

Using panel data from 2004 to 2012, we employ a two-step system GMM estimation technique, with robust standard errors, collapsed instruments and illus-trate marginal effects of central bank independence on financial development in Africa. We also examine the moderating roles of human capital, proxied by literacy rates on the CBI-financial development nexus. We find that, in countries with higher literacy rates/human capital, the positive impact of dejure CBI on financial development is enhanced. Higher literacy rates however, worsen the negative impact of de facto CBO on financial devel-opment. Independent central banks can be made more effective in achieving financial development through governments improving literacy rates. The study is the first to empirically examine the impact of central bank independence on financial development using both dejure and de facto CBI measures and literacy rates in explaining this relationship

The multidimensional effect of financial development on trade in Africa: The role of the digital economy

The issue of how financial development affects international trade has gained much attention in the literature, both theoretical and empirical, without investigating the various transmission channels of financial development on international trade. Significantly, how the digital economy modulates the effects of financial development on trade remains unexplored. Our study addresses these research gaps using panel data from 47 African economies spanning 1990 to 2019. Our findings based on the dynamic system GMM approach show that the direct impacts of financial development and the digital economy have been crucial in driving international trade in Africa in the short and long runs. Second, in the short and long runs, the digital economy serves as a vital channel through which financial development has the most significant impact on trade in Africa. Third, the robustness checks by excluding countries endowed with natural resources in Africa provide robust evidence that digital technology and finance matter for trade. Further, the study discloses an important novelty in that the marginal effects on trade increase when financial development in Africa interacts with the digital economy. In light of these findings, we conclude that policy reforms should focus on policies that encourage the development of the digital economy and its use in the financial sector in Africa.

Remittance and financial development in Africa: A multidimensional analysis

Previous studies on the nexus between remittances and financial system development are less informative due to their failure to investigate how remittance inflows affect different aspects of the financial sector in Africa. In the study, we re-investigate the impact of the remittances on the African financial system in twenty-seven (27) countries for 1980-2017 using the Augmented Mean Group (AGM) estimating technique. The results show that remittance does not have any significant impact on different dimensions of financial development in Africa. This finding is robust to alternative estimating techniques. This implies that remittance inflow is not a major driver of financial development in African countries. The outcomes of this study show that it is important to go beyond the use of conventional measures of financial development and focus more on multidimensional aspects of the sector such as access and efficiency of both the financial institutions and financial markets. It is also worth noting that remittance inflows in African regions are under-documented due to the high level of the shadow economy. The study suggests that the African government should formulate policies encouraging African migrants to pass through formal channels when remitting for the benefits of the financial sector and the economy in general. The policy should also encourage remittance savings and their utilisation in the African productive sector.

Remittance and financial development in Africa: A multidimensional analysis

Previous studies on the nexus between remittances and financial system development are less informative due to their failure to investigate how remittance inflows affect different aspects of the financial sector in Africa. In the study, we re-investigate the impact of the remittances on the African financial system in twenty-seven (27) countries for 1980-2017 using the Augmented Mean Group (AGM) estimating technique. The results show that remittance does not have any significant impact on different dimensions of financial development in Africa. This finding is robust to alternative estimating techniques. This implies that remittance inflow is not a major driver of financial development in African countries. The outcomes of this study show that it is important to go beyond the use of conventional measures of financial development and focus more on multidimensional aspects of the sector such as access and efficiency of both the financial institutions and financial markets. It is also worth noting that remittance inflows in African regions are under-documented due to the high level of the shadow economy. The study suggests that the African government should formulate policies encouraging African migrants to pass through formal channels when remitting for the benefits of the financial sector and the economy in general. The policy should also encourage remittance savings and their utilisation in the African productive sector.

What Drives Financial Sector Development in Africa? Insights from Machine Learning

ABSTRACT This study uses machine learning techniques to identify the key drivers of financial development in Africa. To this end, four regularization techniques – the Standard lasso, Adaptive lasso, the minimum Schwarz Bayesian information criterion lasso, and the Elasticnet– are trained based on a dataset containing 86 covariates of financial development for the period 1990 - 2019. The results show that variables such as cell phones, economic globalization, institutional effectiveness, and literacy are crucial for financial sector development in Africa. Evidence from the Partialing-out lasso instrumental variable regression reveals that while inflation and agricultural sector employment suppress financial sector development, cell phones and institutional effectiveness are remarkable in spurring financial sector development in Africa. Policy recommendations are provided in line with the rise in globalization, and technological progress in Africa.

Digital divide and financial development in Africa

This paper analyses the influence of the digital divide on the new IMF financial development index on a panel of 34 African countries over the period 2005–2017. Using the instrumental variables technique, we arrive at the main result that ICT divide is a severe handicap for the financial systems development in Africa. The use of financial development sub-indices relating to financial institutions and financial markets, as well as their dimensions confirms the negative effect of the digital divide. Our result remains stable when we use alternative measures of financial development and ICT indicators. Furthermore, we found that the digital divide between countries is also a severe handicap for the financial development of countries lagging behind. On the other hand, countries with a technological lead or a digital dividend have relatively developed financial systems. Some recommendations have been suggested to promote digital penetration in Africa, as well as to improve the receptivity and flexibility of African financial systems.

Does Financial Development Really Matter for Poverty Reduction in Africa?

This paper revisits the financial development–poverty nexus. The study builds a robust measure of financial development that captures the state of financial development in Africa. We adopt the measure for examining the relationship between 1996 and 2015. Our results agree with a priori expectation. Overall, we find a reducing effect of financial development on absolute poverty but this does not affect relative poverty. Private credit has a poverty-reducing effect; however, total financial development and financial inclusion do not affect poverty in African countries. Also, stability and efficiency increase poverty levels. Considering the low level of financial inclusion in the continent, it is likely that financial development will reduce poverty in the continent if the poor can access credits. Our results should be interpreted with caution, the commercial banking model may not adequately address poverty in Africa. Hence, much should not be expected in policy circles from financial development for poverty reduction in the present state of financial development in Africa.

Foreign direct investment and financial development in Africa: A causality assessment in the frequency domain

Previous contributions have recognized that Foreign Direct Investment (FDI) and financial development, respectively, play a vital role in enhancing economic growth across nations. However, the causal relationship between FDI and financial development have not been sufficiently investigated in developing countries and particularly in Africa. The current paper overcomes this gap by assessing the direct causality between FDI and financial development for 47 African countries. To that end, the frequency domain Granger causality test is used to establish short (temporary) and long run (permanent) causality. The main results document evidence of permanent and temporary causality in terms of bidirectional or unidirectional links, although there are several cases of no causality between FDI and financial development indicators. The outcomes of this study invite policymakers to address issues regarding the relationship between foreign investments and financial sector from a temporal or a permanent dynamic.

The terrorism-finance nexus contingent on globalisation and governance dynamics in Africa

This study empirically verifies the effect of terrorism on financial development and how globalisation and governance modulate the incidence of terrorism on financial development in Africa. Two terrorism indicators are adopted for this study, namely, the: number of terrorism incidences and number of terrorism deaths. The methodology involves the pooled data technique running from 1996-2018 for 34 African countries. The results from the POLS, Driscoll-Kraay and the Newey-West standard error corrections show that terrorism is detrimental to financial development. From the interactive regressions, three major tendencies are apparent. First, terrorism dynamics consistently have an unconditional negative effect on financial development. Second, the globalization and government dynamics modulate the terrorism dynamics to broadly induce a negative net effect on financial development. Third, policy thresholds at which the modulating variables reverse the net effect on financial development from negative to positive are: (i) 71.61572 trade (% of GDP) and 13.97872 FDI (% of GDP) for the incidence of terror and (ii) 1.16201 trade (% of GDP) for terror deaths. The computed thresholds make economic sense and worthwhile in terms of policy implications because they are within statistical range. The result is robust to alternative measures of terrorism and financial development. Policy implications are discussed.