Effect of financial development on economic growth in sub saharan africa: the role of institutional quality
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Date
2023
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KNUST
Abstract
Recent literature focuses on the influence of institutions on economic development. Given this, a threshold analysis from other studies investigates the threshold level of financial development after which accommodation can be achieved. However, studies that apply the system GMM on the institutions on the finance-growth nexus are limited in SSA leading to a gap in SSA literature. This study investigates the direct effect of financial development on economic growth, and, further examines the effect of quality institutions in this relationship in 28 countries in SSA from 2010 to 2022. Using the system GMM, the study finds an inverse association between financial development and economic growth, highlighting the underdeveloped financial market in SSA countries which has not reached a point where it can foster economic growth. Moreover, the results show that a sound institutional environment promotes economic growth. Finally, the results reveal that given efficient institutional environments such as political stability, rule of law, regulatory quality and overall institutional quality index, financial development can promote economic growth. The results remain robust with a fixed effect estimator. Based on these findings, the study recommends governments and policymakers implement policies that strengthen the financial markets. For instance, frictions in the financial market such as asymmetry information must be avoided through regulations that support quality information and transparency which increases funding and investments in the financial market to support private sector development. In addition, government and policymakers must also implement sound institutions, particularly those that protect investors, encourage political stability, enhance sound policies and promote quality information in the financial market to achieve higher economic growth.
Description
A thesis submitted to the school of business, Kwame Nkrumah university of science and technology in partial fulfilment of the requirements for the award of the degree of master of science in finance