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

Financial development and economic growth in SADC countries: a panel study 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/approachThe 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.FindingsThe 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/implicationsDue to the unavailability of data, the study only focussed on banking sector development. The researcher would have preferred to incorporate stock market development.Practical implicationsDue 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/valueMost 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png African Journal of Economic and Management Studies Emerald Publishing

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

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2040-0705
DOI
10.1108/ajems-10-2018-0329
Publisher site
See Article on Publisher Site

Abstract

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/approachThe 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.FindingsThe 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/implicationsDue to the unavailability of data, the study only focussed on banking sector development. The researcher would have preferred to incorporate stock market development.Practical implicationsDue 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/valueMost 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.

Journal

African Journal of Economic and Management StudiesEmerald Publishing

Published: Feb 12, 2021

Keywords: Financial development; Economic growth; Cointegration; PMG; SADC and PCA; C13; C22; G20; G21

References