Foreign Direct Investment, Financial Inclusion and Banking Sector Development in Africa

Abstract

This study set out to investigate the effect of foreign direct investment (FDI) on financial inclusion (FI) and Banking Sector Development (BSD) and the moderating role of FI on the FDI – BSD relationship. A balanced panel data of fifty- two African countries for a period of fourteen (14) years (2004 to 2017) was used in the study. The fixed and random effects model estimators together with system generalized methods of moment (SGMM) were employed. The discussion of the findings was based on the result of SGMM of respective objectives of the study. The results show that the FDI has negative statistically insignificant effects on financial inclusion. It has statistically significant positive effects on banking sector development. In addition, the interactive term of FDI and FI has negative but statistically insignificant impact on BSD. The study also revealed that financial inclusion decreases banking sector development in African countries. Building a good financial inclusion index and banking sector development index using principal component (PCA) analysis measurement method is important for developing countries like African countries. It helps to assess the level of FI and BSD of each country and between countries together, made easily and accurately for policies formulation and implementation. First, unlike previous studies, the author constructed composite indices for FI and BSD using Principal component analysis (PCA) to assign weights instead of using arbitrary weight or proxy to empirically investigate the relationships between FDI, FI and BSD in Africa. Second, using the interaction term between FDI and FI the author empirically analyzes whether, and to what extent, the banking sector development interact with each other in the process of poverty reduction