Does financial inclusion and financial openness matter for capital market development? Evidence from a panel ARDL-PMG approach

Noah Keya Otinga, Pat Obi and Freshia Waweru

Journal of Financial Economic Policy, 2024, vol. 17, issue 4, 507-529

Abstract: PurposeThis study aims to examine the effect of financial inclusion (FI) and financial openness (FO) on the development of capital markets in Africa.Design/methodology/approachThe study uses data from 34 countries over 18 years (2004–2021) and adopts the panel autoregressive distributed lag and pooled mean group approach, with economic growth, trade openness, government expenditure and institutional quality as control variables.FindingsThe analysis reveals that both FI and FO contribute to the long-term development of capital markets across all income levels within the sampled countries. The interaction between FI and FO enhances capital market development (CMD) over the long run. This finding indicates that FO particularly enhances the development of capital markets in economies with comparatively lower levels of FI.Practical implicationsThe findings of this research underscore the importance for policymakers and professionals to adopt guidelines and regulations that promote FI and openness. Such measures can bolster the development of strong financial systems by improving access to the formal financial sector, and by contributing to the growth of capital markets.Originality/valueThe study is robust to the use of a multidimensional financial and CMD index. It is one of the pioneering studies that explore the relationship between FI and FO, and how this interaction influences CMD.

Keywords: Financial inclusion; Panel ARDL; Financial openness; Capital market development; PMG approach; Long run; Short run (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-04-2024-0099

DOI: 10.1108/JFEP-04-2024-0099

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