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

Abstract

Purpose

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/approach

The 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.

Findings

The 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/implications

Due to the unavailability of data, the study only focussed on banking sector development. The researcher would have preferred to incorporate stock market development.

Practical implications

Due 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/value

Most 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.

Citation

Moyo, C. and Le Roux, P. (2021), "Financial development and economic growth in SADC countries: a panel study", African Journal of Economic and Management Studies, Vol. 12 No. 1, pp. 71-89. https://doi.org/10.1108/AJEMS-10-2018-0329