The effects of financial sector development on economic growth: Evidence from low and middle-income African countries (2000-2017)
Namasaka, Purity Nasambu
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This study sought to examine the effect of bank and stock market based financial sector development on economic growth in 18 African countries during the period of 2000 to 2017. Three homogenous panels were constructed based on World Banks Income classifications: low Income African Countries, Lower- Middle Income African countries and Upper-Middle Income African Countries. Private credit, bank credit and Liquid liabilities were used as bank based financial sector development indicators. Stock market development indicators were market capitalization, traded value of domestic shares and turnover ratio. The dynamic Generalized Method of Moments (GMM) technique was employed using annual data of low-and middle-income African Countries whose stock markets are members of the African Securities Exchanges Association (ASEA). Results from this study revealed that financial sector development significantly affects growth through stock market development in upper and lower middle-income countries. In particular, stock market trade value positively affects growth, where a percentage increases in traded value leads to 0.04% and 0.13% increase in growth for upper and lower middle-income countries, respectively. However, turnover ratio has a statistically significant negative effect on growth for upper middle-income countries where a percentage increase in turnover ratio leads to a drop-in growth rate of approximately 0.1%. Both stock market and banking sectors affect growth in the low-income countries, the effect of stock market through the turnover ratio is negative and statistically significant where a percentage increase in turnover ratio leads to a 0.4% drop in economic growth. On the other hand, the banking sector has a statistically significant effect on growth rates of low-income countries through bank credit where a percentage increase in bank credit has an approximate 22% increase in economic growth. Based on the empirical findings, stock markets solely spur growth in upper- and middle-income countries whereas in low-income African countries, stock markets negatively affect growth. The banking sector through bank credit to private sector has a statistically significant positive effect on growth of low-income African countries. In line with structural transformation in African countries, policies in middle income countries should focus on strengthening the depth of the stock market. On the other hand, Low-income countries‟ financial policy interventions should be directed towards improving private sector credit in the banking sector.