Financial Development and Governance Nexus: Evidence From Sub-sahara Africa

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.