Financial Development, Institutions and Economic Growth in Sub-Saharan Africa

Abstract

This study analyses the effect of financial development on economic growth in SSA and the moderating role played by institutions. The study employed system General Methods of Moments (GMM) approach on 36 SSA countries over 18-year period. The study revealed that using narrow-based financial development indicators as a proxy for financial development may lead to underestimation of the effect of financial development on economic growth. Financial market development is the aspect of financial development that is found to be efficient and effective in affecting economic growth. Again, all the institutional variables are effective in playing the moderating role of institutions on financial development to affect growth but political stability appeared to be the driving force among the institutional variables in SSA. Based on the results, the study recommends that researchers must consider the multidimensional measures for financial development when analysing the effect of financial development on any macroeconomic or policy variable. Also, resources and policies must be directed towards financial market development by various governments and their central banks anytime they desired to stimulate the financial development to affect growth. In addition, the study recommends that, attention should be given to all the institutional variables but political institutions need to be given more priority within the SSA region by various governments.