Abstract:
ABSTRACT
Economies of Sub-Saharan Africa have been touted as possessing low levels of
financial development with weaker institutional structures. The study examines
the financial development and institutional quality nexus to examine whether
the variables exhibit a bidirectional causality. An explanatory design was
adopted for the quantitative study. This nexus was tested empirically on a panel
data of 36 Sub-Saharan Africa countries from 2002 to 2017. Using an
autoregressive distributed lag model based on the pooled mean group estimation
(ARDL-PMG) and panel econometric methods, the study tested for cross sectional dependence, heterogeneity and the existence of long-run relationship
to provide a justification for the model. The Persaran CD test and Blomquist Westerlund tests confirm the presence of cross-sectional dependence and
heterogeneity respectively. Again, Persaran’s CADF, Madela - Wu and
Westerlund panel bootstrap cointegration tests also report that the variables are
stationary and cointegrated. Regarding the PMG panel ARDL, the study
documents a bidirectional causality between financial development and
institutional quality in the long-run. The study recommends governments in
SSA to minimize cost of borrowing and induce access to funding so as to
instigate and make the cost of instituting governance structures bearable.
