Finance and Growth in Africa: The Broken Link

Abstract

ABSTRACT. Utilizing the latest panel cointegration methods we provide new empirical evidence from 18 countries that suggests that the link between finance and growth in SubSaharan Africa is 'broken'. Specifically, our findings show that banking system development in this region follows economic growth. They also indicate that there is no link between bank credit and economic growth.

Financial Development and Economic Growth in Africa: Lessons and Prospects

“…Private seems to be the best financial development proxy because all the growth proxies are significant at 1% whereas gk is significant at 5% for lly (as dependent variable) and not significant for privy (as dependent variable). This observation is contrary to the findings of Demetriades & James (2011) who observed that there is no long run relationship when credit is the proxy for financial development. From the foregoing, we observe that the regression results obtained with two different analytical approaches are not different from each other.…”

“…This aspect of the study does not form part of the King and Levine (1993) study hence difficult to make any comparison. However, it contrasts the findings of Demetriades & James (2011) who find that only liquid liabilities follow (but not lead) growth and Kumar (2011). However it lends support to the findings of Estrada et al (2010); Akinlo & Egbetunde (2010) and Johannes (2011).…”

“…This asserts that the quantity of credit allocated to the private sector is low and needs to improve. The same observation was made by Demetriades & James (2011). The coefficients observed in this study are significantly larger than what the main study of reference for this work obtained.…”

“…Recent studies observe a diminishing or altogether broken link between finance and growth. According to Demetriades & James (2011) in a panel cointegration study on eighteen Sub-Saharan African countries, they observe that while bank liabilities are found to follow (but not lead) growth, the link between credit and growth is altogether absent. Kumar (2011) conducted bounds test analysis and gave a similar opinion that financial development does not have any significant long run effect on per worker income.…”

Local Financial Development and Household Welfare: Microevidence from Thai Households

“…Financial development improves consumption levels by enabling households to spend more money by credit financing. In this context financial development increases the possi-1 For recent counterevidence see Demetriades and James (2011).…”