EFFECT OF FINANCIAL INSTITUTIONS INDICATORS ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICAN COUNTRIES (1992-2017)

EFFECT OF FINANCIAL INSTITUTIONS INDICATORS ON ECONOMIC GROWTH IN SUB-SAHARAN AFRICAN COUNTRIES (1992-2017)
ABSTRACT
It has been established in the literature that a nexus between finance and economic growth exist. This is affirmed by a solid body of research especially for developed countries, which have also shown that stock markets drive and have effect on economic growth more than the banking sector. However, this is not the case with Sub-Saharan African (SSA) countries that are still at crossroads of economic performance, despite many decades of economic reforms anchored on financial institutions to engender economic growth. It is against this backdrop that this study examined the effect of two major institutional components of finance – stock markets and banks on economic growth in SSA countries. The study adopted ex-post facto research design. In line with the objective of the study, eight (8) research questions and hypotheses were formulated and tested using the fixed effect panel data methodology. Secondary data was obtained from the World Bank (2018) panel data set for six (6) SSA countries – Nigeria, Ghana, Kenya, Mauritius, Botswana and South Africa – for the period, 1992- 2017. The dependent variable is economic growth proxied by Gross Domestic Product (GDP) growth rate (gdpgr). The independent variables for stock markets are proxied by stock market capitalization (mc), stock traded total value (sttv), stock traded turnover ratio (sttr) and All-share index (asi); while bank variables were proxied by bank credit to private sector (bcps), bank non-performing loans to total gross loans (bnpl), bank capital assets ratio (bcar), bank liquid reserves to bank assets ratio (blrbar) respectively. Money supply (ms), inflation (inf), interest rate spread (irs) and gross fixed capital formation (cfo) are introduced as macroeconomic control variables. The result revealed that: stock market capitalization, stock market total value traded, stock market turnover ratio, all-share index have significant positive effect on economic growth in SSA countries. On the other hand, bank credit to the private sector, bank non-performing loans, bank capital assets ratio, and bank liquid reserves to bank assets ratio have insignificant positive effect on economic growth in SSA countries. In comparative terms, stock markets have affected economic growth in SSA countries more than the banking sector. The study therefore recommended that SSA countries should continuously reform and strengthen their banking sector and continue to improve on the gains being recorded in their stock markets. This study has contributed to knowledge by using a modified model which included variables not previously used by other researchers and also has unraveled the comparative allocational efficiency of stock markets and banks in SSA countries.