Financial stability gap and private investment nexus: Evidence from sub‐Saharan Africa

Abstract

The illiquidity status of financial institutions widens up the financial stability gap, hence affecting other economic agents that depend on the financial sector. The objective of the study is to determine how the financial stability gap affects private investment in sub-Saharan Africa (SSA). Annual time series secondary data from 33 SSA countries for the period 2007-2018 was used.Using the general methods of moments (GMM) estimation technique, we found that the financial stability gap beyond 109.9% becomes detrimental to private sector investment while government effectiveness and investment by the government improve private investment. The study recommends that financial institutions undertake liquidity protection measures as a means of protecting the stability status, while SSA governments invest in the economy and provide the needed business environment for private sector investment.

Drivers of financial stability gap: evidence from sub-Saharan Africa

“…Also, in applying individual variables in the detection of the evidence of instability in the financial system of a forthcoming financial crisis, both the post-Keynesian and the monetarists observe a collection of indicators that is a representation of their views. A recent study by Kulu (2023), investigated the effect of the financial stability gap on private investment in SSA. Though the drivers of the gaps were not addressed in this study, it was highlighted that there exist gaps in financial stability in the region and a gap beyond a threshold of 109% significantly reduces private investment.…”

“…A critical evaluation of the empirical literature shows that aside from the estimations provided by Kulu et al (2022b) and Kulu (2023), relatively limited attention has been given to further investigations on the financial stability gap. Specifically, no known study has investigated what drives the gap in financial stability, especially in SSA where significant efforts are being made to bridge the financial stability gap.…”

“…These revelations and for that matter, the addition to knowledge in the literature of financial stability are relevant for policy implications. For instance, the literature (Kulu, 2023) highlights that a financial stability gap beyond 109% is detrimental to investment by the private sector. Knowing this awakens the interest of addressing this gap so that the private sector at least, can benefit especially in a region where this sector has been identified as the engine of growth.…”

“…This implies that the financial system is more stable when the liquidity position of financial institutions is adequate. This also indicates a minimal financial stability gap, as the benchmark or the potential stability position will not deviate much from the actual stability position (Kulu, 2023). Thus, a financial stability gap is experienced when the actual stability (predominantly measured in the literature as the z-score of financial institutions) falls short of the potential stability.…”

Does financial development really spur industrialization in sub‐Saharan African countries?

“…First, contrary to the economic literature that has mainly focused on developed and developing countries, we focus exclusively on SSA countries. Thus, apart from the work of Lo and Cissokho (2023), the few empirical papers on SSA countries have examined the relation between financial development and investment (Keho, 2023;Kulu, 2023), tax revenue mobilization (Chebochok & Bayale, 2023) and economic development (Ajakaiye & Tarp, 2012). However, these studies have ignored the effect of financial development on industrialization.…”