Financial development and economic growth in SADC countries: a panel study

Clement Moyo and Pierre Le Roux

African Journal of Economic and Management Studies, 2020, vol. 12, issue 1, 71-89

Abstract: Purpose - The impact of financial development on economic growth has received considerable attention since the 2008/2009 global financial crisis. High levels of credit to the private sector were partly to blame for the crisis, and this has re-ignited the debate on whether the growth-enhancing effects of financial development outweigh the retarding effects associated with financial crises. This paper therefore examines the financial development–growth nexus in SADC countries during the period 1990–2015. Design/methodology/approach - The empirical analysis is conducted using the pooled mean group estimator. Furthermore, financial development indices are created due to the strong correlations between the individual financial development indicators using principal component analysis. Findings - The results show that financial development, captured by the indices or the individual financial development indicators, has a negative impact on economic growth in the long term. Research limitations/implications - Due to the unavailability of data, the study only focussed on banking sector development. The researcher would have preferred to incorporate stock market development. Practical implications - Due to financial vulnerabilities emanating from an inadequate monitoring and supervisory framework, further enhancement of financial development should be undertaken with caution in SADC countries. Therefore, institutional quality should be enhanced in order for SADC countries to benefit from the development of the financial sector. Originality/value - Most studies investigating the financial development–growth nexus in SADC countries utilise the individual measures of financial development which often produce contradicting results. This study constructs financial development indices to capture the impact of various banking sector development indicators on growth.

Keywords: Financial development; Economic growth; Cointegration; PMG; SADC and PCA; C13; C22; G20; G21 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Working Paper: Financial development and economic growth in SADC countries: A panel study (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajemsp:ajems-10-2018-0329

DOI: 10.1108/AJEMS-10-2018-0329

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