Financial Development and Economic Growth in Uganda: A Multivariate Causal Linkage

Abstract

In this study, we have explored the dynamic causal relationship between financial development and economic growth in Uganda during the period from 1980 to 2015. Although the financegrowth nexus debate had been raging for decades, Uganda, just as many other low-income sub-Saharan African countries, has not yet received adequate coverage on the subject. To eliminate the variable-omission-bias associated with some previous studies, two intermittent variables namely, savings and inflation, have been included alongside financial development and economic growth in a multivariate Granger-causality setting. In addition, five proxies of financial sector development have been used in the current study, namely money supply, deposit money bank assets as a percentage of bank assets, liquid liabilities to GDP, private credit by deposit money banks to GD, and bank deposits to GDP. Using the ARDL approach, the findings of the study reveal that the direction of causality between financial development and economic growth in Uganda is not clear-cut. It varies from one model to the other, depending on the proxy used for financial development. When financial development is proxied by liquid liabilities to GDP and bank deposits to GDP, a unidirectional causality from financial development to economic growth is found to prevail. When deposit money bank assets to bank assets ratio is considered a proxy of financial development, a bi-directional causality between financial development and economic growth is found to predominate. Finally, when money supply and private credit by deposit money banks to GDP proxies are used, no causality is found to exist between financial development and economic growth in either direction. Based on these results, it is recommended that when drafting policies aimed at boosting economic growth, policymakers should target growth-led financial development proxies as policy implementation outcome may vary depending on the targeted financial development proxy.

Financial inclusion and financial sector development in Sub-Saharan Africa: a panel VAR approach

“…This is because economic growth according to the literature is a driver of FSD and financial inclusion. FSD and financial inclusion could also be drivers of economic growth (Park and Mercado, 2015; Suleiman and Abu-Qaun, 2008; Creane et al , 2003; Odhiambo, 2005).…”

“…Some empirical papers have analysed the effect of financial inclusion on economic growth together with income inequality and poverty alleviation (Park and Mercado, 2015). Other researchers have also investigated the link between economic growth and FSD (Levine, 1997; Tsuru, 2000; Suleiman and Abu-Qaun, 2008; Creane et al , 2003; Odhiambo, 2005). However, despite empirical findings supporting the positive impact of financial inclusion on growth and the effect of FSD on economic growth, there is a gap remaining in the literature regarding the tripartite relationship among financial inclusion, FSD and economic growth.…”

Financial inclusion and migrant remittances in Sub-Saharan Africa: a panel VAR approach

“…According to most empirical studies, financial sector development and financial inclusion are also found to be drivers of economic growth (Park and Mercado, 2015; Abu-Bader and Abu-Qarn, 2008; Creane et al , 2003; Odhiambo, 2005). Similarly, some empirical papers have also examined the impact of financial inclusion on poverty reduction, economic growth, income inequality, monetary policy and financial sector development (Anarfo et al , 2019a; Anarfo et al , 2019b; Brune et al , 2011; Burgess and Pande, 2005; Park and Mercado, 2015; Honohan, 2008; Rojas-Suarez, 2010; Thorat, 2006; Chibba, 2009; Dabla-Norris et al , 2015; Kpodar and Andrianaivo, 2011; Johal, 2016; Sharma, 2016).…”

“…Similarly, some empirical papers have also examined the impact of financial inclusion on poverty reduction, economic growth, income inequality, monetary policy and financial sector development (Anarfo et al , 2019a; Anarfo et al , 2019b; Brune et al , 2011; Burgess and Pande, 2005; Park and Mercado, 2015; Honohan, 2008; Rojas-Suarez, 2010; Thorat, 2006; Chibba, 2009; Dabla-Norris et al , 2015; Kpodar and Andrianaivo, 2011; Johal, 2016; Sharma, 2016). Other researchers have also examined the link between financial sector development and economic growth (Levine, 1997; Abu-Bader and Abu-Qarn, 2008; Creane et al , 2003; Odhiambo, 2005). Thus, the bi-causal linkages among financial inclusion, remittances, economic growth and financial sector development appear to have eluded the thought of researchers, and this has resulted in a limited understanding of the relationship among these variables.…”

“…This study controlled for financial sector development and economic growth because they are known, according to the literature, to be drivers of financial inclusion and remittances (Brune et al , 2011; Burgess and Pande, 2005; Honohan, 2008; Giuliano and Ruiz-Arranz, 2009; Park and Mercado, 2015; Abu-Bader and Abu-Qarn, 2008; Creane et al , 2003; Odhiambo, 2005). This suggests that financial sector development and economic growth have the potential to increase financial inclusion and remittances and vice versa.…”