Stock Markets, Banks And Growth In Sub-Saharan Africa

Abstract

Economic literature proposes stock market development and bank development as growth-inducing avenues. However, the long run and causal linkage focussing on the interaction between stock market development, bank development, and economic growth in Sub-Saharan Africa (SSA) has not received much attention among scholars. This study provides some insights on the long run and causal relationship between stock market development, bank development and economic growth for a group of 12 selected SSA countries for the period 1990-2014. Our sample had 13 selected SSA countries but we took out Zimbabwe, which had an outrageous mean inflation of 46.5 million percent Using the Pedroni cointegration test, this study established that stock markets and bank development do not have long run trends with economic growth for the selected SSA countries irrespective of the bank development measure used. To analyse the causal linkages, this study conducted Wald tests after running panel system GMM regressions. We used the system GMM estimator since it realizes more efficiency than the difference GMM estimator does. For the case of stock markets and bank development with economic growth and using bank credit ratio as the measure of bank development, this study found evidence supporting the supply-leading hypothesis. Further, the study established no causality between bank development and stock market development. Lastly, we concluded that the causality between stock market development, bank development, and growth for the chosen SSA economies is sensitive to the choice of bank development measure. The two alternative measures used were the broad money ratio and the domestic credit ratio. Based on the findings of this study, we recommend formulation of policies that promote further stock markets and bank development to support economic growth for the chosen SSA countries.