Between Finance and Growth: The Role of Financial Development in Promoting Economic growth in Africa
DOI:
https://doi.org/10.37075/FABA.2025.1.08Keywords:
Financial development, Economic growth, Financial institutions, Panel ARDL, African countriesAbstract
Purpose: This study investigates the impact of financial development on economic growth, with a particular focus on the roles of financial institutions' access, depth, and efficiency. It aims to provide a nuanced analysis of the finance-growth nexus and evaluate whether financial development acts as a catalyst for or a constraint on economic growth within the African context.
Design/Methodology/Approach: The study employs the Panel ARDL (Autoregressive Distributed Lag) approach to analyze the short-run and long-run effects of financial development on GDP. The analysis is conducted on a panel of 31 African countries over the period 1990–2021, capturing both cross-country variations and dynamic relationships between financial development indicators and economic growth.
Findings: The findings emphasize that financial access and depth are key drivers of long-term economic growth, whereas financial efficiency exerts a negative impact. In the short run, financial access significantly enhances GDP, while financial depth may impede growth due to transitional costs or structural imbalances. Moreover, the heterogeneous short-run effects across countries underscore the pivotal role of institutional and economic factors in shaping the financial development and economic growth nexus.
Practical Implications: Policymakers should prioritize financial inclusion and sector depth while addressing inefficiencies that may hinder economic performance. Strengthening regulatory frameworks and improving financial institutions’ operational effectiveness can foster sustainable economic growth.
Originality/Value: This study provides new empirical evidence on the finance-growth nexus in African economies, considering multiple dimensions of financial development and utilizing a robust econometric approach (Panel ARDL). It contributes to the debate on financial development by distinguishing between access, depth, and efficiency.
Paper Type: Research Paper.
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