Financial Deepening, Domestic Resource Mobilisation And Per Capita Income Growth In Africa

Abstract

Financial sector has gained prominence as a possible determinant of saving and growth in the globalized financial markets. The financial sector in Africa, since the 1990s, continues to experience some reforms and development. However, despite all these reforms in the financial sector, the region has low levels of domestic savings resulting in the dependence on foreign resources for their infrastructure needs, which mostly are associated with volatilities and uncertainties. Based on this background, the study empirically examines whether the deepening of the financial system in Africa has stimulated domestic resource mobilisation and income growth employing the System GMM estimation technique for the period 1998 to 2013. Based on the life cycle hypothesis and the AK endogenous growth model, a model linking savings and its determinants as well as growth and its determinants were specified. The empirical results revealed that the financial system in Africa has not been developed enough to stimulate domestic resource mobilisation and enhance growth. The different measures which were employed to measure financial deepening were found to be positive but insignificant, implying that financial deepening has not stimulated domestic resource mobilisation and income growth in Africa. An interesting observation from the empirical results is the negative effect of interest rate and savings implying that savings in the region depends more on income than on real interest rate. This is in contrast to the McKinnon and Shaw theory that savings positively depends on real interest rate. The study recommends the need for countries in the region to intensify the ongoing financial sector reforms to focus on its primary role of mobilizing and allocating resources.