Does digitisation determine financial development? Empirical evidence from Africa

Adam, Umar; Sulemana, Abdul Latif; Sule, Mohammed Shamsudeen Sandow; Yussif, Mohammed Mudasir Article Does digitisation determine financial development? Empirical evidence from Africa Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Adam, Umar; Sulemana, Abdul Latif; Sule, Mohammed Shamsudeen Sandow; Yussif, Mohammed Mudasir (2024) : Does digitisation determine financial development? Empirical evidence from Africa, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-19, https://doi.org/10.1080/23322039.2024.2341214 This Version is available at: https://hdl.handle.net/10419/321472 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Does digitisation determine financial development? Empirical evidence from Africa Umar Adam, Abdul Latif Sulemana, Mohammed Shamsudeen Sandow Sule & Mohammed Mudasir Yussif To cite this article: Umar Adam, Abdul Latif Sulemana, Mohammed Shamsudeen Sandow Sule & Mohammed Mudasir Yussif (2024) Does digitisation determine financial development? Empirical evidence from Africa, Cogent Economics & Finance, 12:1, 2341214, DOI: 10.1080/23322039.2024.2341214 To link to this article: https://doi.org/10.1080/23322039.2024.2341214 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 27 Apr 2024. Submit your article to this journal Article views: 1039 View related articles View Crossmark data Citing articles: 1 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 FINANCIAL ECONOMICS | RESEARCH ARTICLE Does digitisation determine financial development? Empirical evidence from Africa Umar Adam a , Abdul Latif Sulemana b , Mohammed Shamsudeen Sandow Sule c and Mohammed Mudasir Yussif d a Department of Agriculture and Food Economics, University for Development Studies, Tamale, Ghana; b Department of Accounting and Finance, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana; c Treasury Unit, University for Development Studies, Tamale, Ghana; d Department of Finance, School of Business, University for Development Studies, Tamale, Ghana ABSTRACT Africa is investing and recalibrating its digital infrastructure in the financial and other sectors to support economic growth and development. It is in light of this, the study seeks to examine from an empirical perspective whether digitisation has a significant role in financial development in African countries. Specifically, the study employed macroeconomic data on Africa from World Development Indicators (WDI) from the period of 2000-2021. The data covers all the 54 African countries. Bayesian Panel Vector Auto-Regressive (BPVAR) was adopted to estimate the parameters involved in the study objective. The results indicate that digitisation helps to increase financial inclusion, reduce transaction costs, and promote the development of new financial products and services, all promoting financial development and exploiting its allied opportunities. The findings also suggest that other factors such as infrastructure, financial inclusion, economic development, institutional quality, and government support are important for the development of the financial sector and should be addressed in conjunction with digital innovation. Policymakers in Africa should take note of these findings and work to create an enabling environment that supports financial sector development. Efforts to improve institutional quality, governance, and infrastructure can help to create a more conducive environment for financial development. Overall, the study suggests that digitisation has the potential to improve financial sector development in Africa, and can play a key role in mitigating financial risk, improving financial sector efficiency and harnessing the opportunities that abound in the financial sector. IMPACT STATEMENT There are currently encouraging efforts in place by African leaders to digitise almost every sphere of the African economy as a result, Africa is witnessing rapid development in the digital front especially in the financial sector. It is in the light of the aforementioned, the study examined from an empirical perspective whether digitisation has a significant role in financial development in African countries. The results indicate that digitisation helps to increase financial inclusion, reduce transaction costs, and promote the development of new financial products and services, all promoting financial development and exploiting its allied opportunities. The findings also suggest that other factors such as infrastructure, financial inclusion, economic development, institutional quality, and government support are important for the development of the financial sector and should be addressed in conjunction with digital innovation. The study is advocating for policymakers in Africa to take note of these findings and work to create an enabling environment that supports financial sector development. Efforts to improve institutional quality, governance, and infrastructure can help to create a more conducive environment for financial development. Overall, the study suggests that digitisation has the potential to improve financial sector development in Africa, and can play a key role in mitigating financial risk, improving financial sector efficiency and harnessing the opportunities that abound in the financial sector. ARTICLE HISTORY Received 26 September 2023 Revised 27 February 2024 Accepted 5 April 2024 KEYWORDS Financial sector development; economic growth; digitisation; bayesian panel vector AutoRegressive model; gross domestic product SUBJECT Economics, finance, development studies, cities &; the developing world, urban development REVIEWING EDITOR Yamini Sharma, Taylor and Francis, India CONTACT Umar Adam [email protected] University for Development Studies, P. O Box TL 1350, Tamale, Ghana ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2341214 https://doi.org/10.1080/23322039.2024.2341214 Introduction The financial sector is an essential mechanism for facilitating transactions, mobilising savings, allocating capital, and managing risk (Rani et al., 2023). Financial development is a critical factor in promoting growth and development, especially in developing regions such as Sub-Saharan Africa (SSA), through the facilitation of savings allocation towards productive investments (Ibrahim, 2017). Nevertheless, the efficient allocation of resources through effective intermediation, which is enabled by digital infrastructure, is not enough for mere savings mobilisation (Otchere et al., 2017). Financial development promotes the exchange of commodities and services, enables the production of investment information, oversees corporate governance, and facilitates trading and risk management, according to Evans et al. (2019). To revive their economies, SSA nations implemented structural adjustment programmes in response to the economic crises of the 1970s and 1980s (Graham, 1996). Financial liberalisation, which signified a transition to more efficient and transparent financial systems, arose as an essential element of these initiatives. Numerous development economists assert that the liberalisation of financial systems encourages domestic investments and savings, thereby improving the efficacy of capital allocation (Graham, 1996). As a result, initiatives to foster economic expansion and progress in the area incorporated financial sector reforms as a fundamental component (Otchere et al., 2017). There is an increasing focus on utilising digital infrastructure to propel the development of the financial sector as economies in Sub-Saharan Africa (SSA) progress (Alagidede et al., 2020). The financial sector’s integration of Information and Communication Technology (ICT), which encompasses digital currency exploration and mobile money transactions, is indicative of a more extensive digitalisation trend in Sub-Saharan Africa (IMF, 2022). African nations have initiated digitisation and financial reforms in response to these developments to bolster their competitiveness and foster economic expansion (Alagidede et al., 2020). Despite a growing body of scholarly work that examines the relationship between digitisation and financial development, there is still a lack of comprehension regarding the impact of digital infrastructure on the dynamics of the financial sector in Sub-Saharan Africa (Ejemeyovwi et al., 2021). The objective of this research is to fill this void by investigating the determinants of financialisation, specifically digitisation, and offering policy suggestions that leverage the capabilities of digital technologies to promote the financialisation of African economies. The findings of this research have substantial implications for policy and practice concerning the digitalisation and development of the financial sector. First, through an analysis of the determinants promoting financialisation, such as the impact of digitisation, this research enhances our understanding of how digital infrastructure affects the dynamics of the financial sector in Sub-Saharan Africa. The inclusion of this empirical evidence will not only contribute to the advancement of academic discourse but also provide development agencies, financial institutions, and policymakers with invaluable insights on how to utilise digital technologies to foster sustainable economic expansion. Furthermore, financial institutions that operate in SSA can benefit from the practical implications of this study’s findings. Through the process of identifying the factors that influence financialisation and how they relate to digitisation, financial institutions can enhance the precision of their approaches to exploit the potential benefits that digital technologies offer. Potential strategic initiatives to address this issue encompass augmenting financial inclusion programmes, investing in digital infrastructure, and expanding digital banking services to underserved populations. Moreover, regulatory frameworks designed to promote digital financial services while mitigating potential risks associated with technological advancements may be informed by the findings of this research. The findings of this study have the potential to provide policymakers with valuable insights as they develop evidence-based interventions aimed at fostering financial sector development and capitalising on the revolutionary capabilities of digitalisation. Through comprehending the determinants that propel financialisation, policymakers can enact focused measures that tackle obstacles to the widespread adoption of digital technologies, fortify the capabilities of institutions, and augment the level of financial literacy within the populace. Furthermore, the knowledge gained from this research can provide valuable input for macroeconomic strategies that seek to cultivate inclusive growth, increase competitiveness, and foster economic stability throughout Sub-Saharan Africa. 2 U. ADAM ET AL. Empirical review While it is clear that financial development exhibits a significant positive nexus with economic growth the question of what determines financial development remains unanswered. Economists, practitioners and empirical studies have still a subpar understanding of the aforementioned key issue. The positive nexus between financial development and economic growth links has aroused the interest of researchers to unearth what determines financial development. Literature connecting digital infrastructure and financial sector development in Africa is fascinating whereas there are studies that have investigated the role of digitisation in promoting financial development, the majority of the studies are based on firmlevel data for instance, Taiminen and Karjaluoto (2015) conducted research to highlight on the goals of digital marketing and the elements that influence its acceptance and use by small and medium-sized enterprises (SMEs). The sample includes 16 managers from SMEs who took part in semi-structured thematic interviews and 421 survey respondents from Central Finland. The poll found that small and medium-sized enterprises are not making the most of digital technologies. It is also unclear from the data whether SMEs are recognising the game-changing impact that digitalisation has had on communication. Molinillo and Japutra (2018) performed a literature analysis to assess the determinants that affect the deployment of digital information and technology inside organisations, with a special emphasis on small and medium-sized enterprises (SMEs). The results show that businesses of all sizes may benefit from using digital information and technology in marketing-related activities. Three primary theories (the diffusion of innovation theory, the technology-organisation-environment framework, and the institutional theory) have been employed to get a deeper understanding of the adoption process. These two concepts, when combined, may simplify the adoption process for everyone involved. Payne et al. (2018) performed research to construct a conceptual model that describes the major determinants influencing Lebanese bank customers’adoption of mobile banking. The hypotheses were evaluated using structural equation modelling and route analysis based on survey data. The study captured 320 participants. The results demonstrate that consumers’views about adopting mobile banking are mostly influenced by their level of digital literacy, resistance to change, perceptions of risk, usability, and usefulness. By contrast, awareness and compatibility had no discernible impact on adoption. Despite using micro-level data, some studies used country-level or macroeconomic data for instance, Yussif et al. (2019) examined the implications of digitisation for financial development in emerging economies. The authors analysed secondary data across 30 emerging economies from 2004 to 2017 extracted from the World Bank’s World Development Indicators (WDI) database as well as the International Telecommunications Union. Adopting the Generalised Method of Moments (GMM) estimations for the analysis, the authors concluded that digitisation remains a key determinant of financial development. The study prescribed a policy push among emerging economies to broaden their investment in technology development for the financialisation of their economies. According to Voghouei et al. (2011), the financial system is supported by aspects including good institutions, open financial and trade markets, legal tradition, and political economy. Political and economic factors might be the ones that have the greatest influence on financial development because they can affect it directly as well as indirectly through other determinants (Voghouei et al., 2011). Variations in a country’s political economy may well account for differences in its financial development. The results of Law and Habibullah, (2009) dynamic panel data analysis show that real per capita income and institutional quality are statistically significant predictors of banking sector development and capital market development. However, trade openness plays a bigger role in fostering the growth of the capital market. The empirical findings of financial liberalisation revealed that while stock market liberalisation is powerful in bringing about stock market development, domestic financial sector reforms are likely to boost banking sector development. According to Ayadi et al. (2013), a full bundle of strong legal institutions, excellent democratic administration, and competent financial reform implementation can have a significantly positive impact on FD. Furthermore, while the capital account is open, inflation has a less negative impact on banking development. Growing public debt slows credit expansion, proving that public debt ‘crowds out’private lending. Also, capital inflows predominantly have an income COGENT ECONOMICS & FINANCE 3 effect, increasing national savings and credit availability via raising income and consequently financial development (Ayadi et al., 2013). Takyi and Obeng (2013) discovered a distinctive cointegrating link between financial development, inflation, trade openness, reserve requirement, per capita income, and government borrowing using quarterly data from 1988 to 2010. The regression analysis findings indicate that per capita income and trade openness are crucial factors in Ghana’s financial development. People’s attitudes regarding the financial market alter as society develops in the form of greater trust, control, and other attributes, and they do more financial transactions. Consequently, improved financial development results. Dutta and Mukherjee (2012) discovered that culture strongly affects the degree of financial growth using the quantile estimation technique for a sample of 90 nations. Cherif and Dreger (2016) findings implied that institutional factors matter in both financial categories, even after controlling for traditional macroeconomic variables and fixed effects. Corruption appears to have the greatest impact on the banking industry. The effects of corruption and law and order seem to matter for the stock market. Openness to foreign commerce is crucial for all facets of financial development, even though per capita income and inflation do not appear to be key factors according to Cherif and Dreger (2016). Ibrahim and Sare (2018) demonstrate that, even though human capital has a significant impact on financial development, trade openness has a greater impact on private credit than on domestic credit. Financial development is closely tied to the interacting concepts of openness and human capital. The marginal effects analysis shows that trade openness (human capital) has a bigger impact on private (domestic) credit than human capital. The study substantially supports the idea that trade openness and human capital development are both important factors in the financial success of Africa. Khalfaoui (2015) indicates that the degree of economic and human development, as well as the banking and financial sectors, are the key predictors of financial development. The study further intimated that only in industrialised nations do the factors connected to economic stability and the institutional and legal framework have a considerable impact on financial development. Gu et al. (2021) demonstrate the significance of income, human capital, technical innovation, and research and development (R&D) spending as long-term factors influencing financial development. The study further discovered that in the E7 countries, human capital strengthens the link between technological innovation and financial success. Asratie (2021) revealed that economic development, trade openness, and the political freedom index all have a favourable shortand long-term impact on financial development. Interest rates and reserve requirements, however, have a negative impact. The study further shows that the real exchange rate has little impact in the short term and a negative impact over the long term. The credit-to-private sector model, on the other hand, is influenced favourably by inflation, political freedom, economic growth, and trade openness. However, foreign debt, the need for reserves, and lending interest rates have a negative impact (Asratie, 2021). Zafar et al. (2022) show that information and communications technology (ICT) investment needs policymakers’attention because they have empirically established long-run inverse consequences of the aforementioned in terms of financial development. Control of corruption, government effectiveness, political stability, and free speech and accountability are the main World Governance Indicators (WGIs) that significantly affect financial development, according to the empirical findings of Eldomiaty et al. (2020). According to IMF (2022), Sub-Saharan Africa (SSA) is witnessing rapid development in the digital front especially in the financial sector and given the above empirical studies, it is evident what determines financial development depends on or varies from country to country. This may be related to specific national policies, geo-politics and regional economic policies. We find it necessary to investigate whether investment in the digital front determines financial development in Africa. Hypothesis development The effect of digitisation and financial sector development The financial services delivery sector has undergone a significant transformation due to digitisation, which has been propelled by developments in information and communication technologies (ICT). This transformation has resulted in enhanced efficiency, accessibility, and inclusivity within the financial 4 U. ADAM ET AL. system (Ibrahim, 2017; Ibrahim et al., 2022). Financial institutions have the potential to access previously unreachable segments of the population, expedite operations, and decrease transaction expenses through the utilisation of digital platforms and electronic channels (Mishra et al., 2020). Furthermore, the process of digitisation has enabled the advent of novel financial products and services, including peerto-peer lending, mobile banking, and digital payments. These advancements have not only empowered businesses and individuals but have also democratised access to financial services (Ibrahim et al., 2022). Nevertheless, the extent to which digitisation influences the progress of the financial sector is dependent on a multitude of elements, such as digital literacy, infrastructure, cybersecurity, and regulatory frameworks (Molinillo & Japutra, 2018). Digitisation, although capable of significantly augmenting economic growth and fostering financial inclusion, presents obstacles to data privacy, cybersecurity risks, and regulatory adherence (Khalfaoui, 2015). As a result, policymakers, regulators, and practitioners must comprehend the interplay between digitisation and the development of the financial sector to exploit the advantages of digital innovation while minimising potential vulnerabilities and risks. Based on this, they hypothesized that: H1: Improved digitisation has a positive significant effect on Financial Sector Development in SSA Methodology Population and sample The population of the study encompassed all eligible participants or study entities that were considered in the study. Thus, the study area is Africa, where 54 countries in the sub-region constituted the population. A census study was undertaken; thus all 54 countries were included in the study. The countries included are, Algeria, Angola, Benin, Burkina Faso, Burundi, Botswana, Cameroon, Central African Republic, Chad, Cote d’Ivoire, Congo Republic, Comoros, Cape Verde, Democratic Republic of Congo (DRC), Djibouti, Egypt, Equatorial Guinea, Eritrea, Eswatini, Ethiopia, Gabon, Ghana, the Gambia and Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Libya, Madagascar, Malawi, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, South Sudan, Sudan, Tanzania, Togo, Tunisia, Uganda, Zambia and Zimbabwe. The secondary data for these countries was extracted over 21 years, thus from 2000 to 2021 from the World Bank. Variable description The World Bank’s World Development Indicators (WDI) were mined for information on the 54 nations in Africa. Specifically, the following variables were elicited to achieve the study objectives: Financial Sector Development: the financial development index of each country was used to measure financial sector development. The index constituted six measurements; they are financial depth, financial access, financial stability, financial size, financial efficiency and financial activity. Digitisation: Three proxy variables were used to measure the adoption of digitisation in the countries under study. Therefore, the variables of information and communication technology (ICT), national innovation, and the relationship between digitalisation and innovation. The prevalence of ICT was evaluated by tallying the number of mobile phone users and internet browsers. Innovation on the other hand was measured by the number of Scientific and technical journal articles in each country. The study also included controlled variables based on the extant literature of Ejemeyovwi et al. (2021) and other studies. Therefore, controlled variables such as institutional quality (IQ) and real gross domestic product growth (GDPGR) among others were used for the study. Institutional Quality: The quality of governance in each country in Africa was taken into account for the research. Therefore, we utilised the World Bank’s data to create a governance index. COGENT ECONOMICS & FINANCE 5 Financial Inclusion: We employed the two-stage PCA method, and as a result, we first assessed the three sub-indices of usage, barriers, and access that, following the literature, constitute financial inclusion. Using the dimensions as explanatory variables, we estimate the dimension weights and the overall financial inclusion index in the second stage. Variables and A-prior signs Table 1 indicates the Variable description, data sources and a priori signs of the variables used in the study. Data analysis To determine the link and interdependence between macroeconomic and financial variables as used in this study, the VAR model is pertinent. However, this model is time-invariant; as such, highly restrictive in accounting for the dynamics of time-series economic data (Pacifico, 2018). Therefore, the effect of digitization on financial development in Africa was achieved with the Bayesian Panel Vector Auto-Regressive (BPVAR). This method has been used by Rahman et al. (2023), Berdiev and Saunoris (2016)andEjemeyovwietal.(2021) which turned out to produce very efficient and unbiased results. Prior and post-estimation tests were conducted to ensure the reliability and validity of the estimated models. The preliminary tests such as descriptive statistics (such as mean, standard deviation, skewness and kurtosis) and graphical representation of the data preceded the main data analysis. This was aimed at getting the overall picture and trend of the data set. Also, some important pre-test analysis of the panel data is the stationarity test of the variable to ensure the model is devoid of spurious regression and to assist in identifying a suitable methodology for the study. Post-estimation tests included correlation, multicollinearity, and heteroscedasticity among others. The panel regression model used in the analysis included all dependent, independent and controlled variables. This study employed SPSS v26 and Eviews version 10 as analytical software for this study. While the study employed SPSS v26 to perform the dimensional reduction method, the selection of Eviews version 10 was based on its strong functionalities in time-series analysis and econometric modelling, which make it highly suitable for investigating the dynamics of the financial sector. Similar software was used in previous studies (e.g. Ejemeyovwi et al., 2021). Consider the functional form of the model in equation (1): FD ¼fS,X,Z ðÞ (1) Where the independent variables are represented by S, X, and Z. S represents Information and communication technology (ICT), X is innovation, and Z is the control variables. In panel form, the implicit functional form is represented as: FDi,t¼f ICTi,t,INNi,t,GDPGRi,t,IQi,t,INFi,t,GSi,tFIi,tEDi,t,POPi,t,UEMi,t ðÞ (2) Where the subscripts ‘i’and ‘t’represent country ‘i’at time ‘t’. See Table 1 below for variable descriptions and measurements. The explicit model for the study is specified as presented in equation (3). FDi,t¼b0þb1ICTit þb2INNi,tþb3IQi,tþb4GDPGRi,tþb5INFi,tþb6GSi,tþb7FIi,tþb8EDi,tþb9POPi,t þb10UEMi,tþei,t(3) To compute for Financial Development (FD), the study employed SPSS v26 to perform the dimensional reduction method. Thus, the widely used principal component analysis (PCA) technique as used by Ejemeyovwi et al. (2021) was employed in this study. This method enabled the study to reduce and transform the six constructs (that is; financial depth, financial access, financial activity, financial efficiency, financial size, and financial stability) that measure FD into a smaller data set or variables while still keeping the relevant information of the data. The purpose of this study is to gauge the effect of one variable (digitization) on the other (financial development). This necessitated the use of the Bayesian Panel Vector Auto-Regressive (BPVAR) method. The BPVAR is not entirely different from the conventional VAR model, especially regarding the 6 U. ADAM ET AL. interdependency and endogeneity of the variables; except that BPVAR incorporated the cross-sectional nature of the data to ensure that shocks from one country do not transmit to other countries (Thi Thuy & Nguyen Trong, 2021). Time variations in the coefficients and the variance of the shocks and accounting for cross-sectional dynamic heterogeneities are all easily incorporated into the BPVAR, making it a useful tool for capturing both static and dynamic interdependencies (Ejemeyovwi et al., 2021; Thi Thuy & Nguyen Trong, 2021). VARs are statistical models with a great deal of leeway because of their many free parameters. By considering the model parameters to be independent random variables and assigning them prior probability, the BVAR eliminates the issue of over-parameterisation. Using the Bayesian theorem in conjunction with conventional VAR models, the BPVAR approach can circumvent the shortcomings of the unconstrained VAR (UVAR) technique, the gold standard for estimating the dynamics of economic issues. The UVAR has been criticised for being excessively open-ended and lacking limitations in its presentation of the autoregressive components of the model. In his (2018) paper, Pacifico highlighted the results of their generalised UVAR models. (1) The problem of overfitting, caused by the lack of prior beliefs and leading to unreliable coefficients, is nearly always present in models with an unconstrained structure. This problem is generated by the fact that there are no prior beliefs. (2) The analysis often provides a straightforward account of the facts it examines. In a nutshell, these findings may not be accurate, hence the implementation of the BPVAR model in this study. Given that the coefficients beyond the dependent ones are given smaller relative variances since fluctuations or deviations in VAR models are compensated for by their lags. Additionally, a fixed varianceTable 1. Variable description, data sources and a priori signs. Variables Description Measurement Data Source A priori Sign Dependent Financial Sector Development (FD) 1. Financial Depth 2. Financial Access 3. Financial Activity 4. Financial efficiency 5. Financial size 6. Financial stability 1. The ratio of private sector credit to GDP 2. Depositors with commercial bank 3. Issuance of private domestic loans from financial institutions 4. The ratio of bank credit to bank deposit 5. Bank assets on central bank assets 6. Z-score of banks World Bank Financial Development Database Trading Economics, 2022 Independent Variables Digitisation 1. ICT 1. Subscribers of mobile phone 2. Internet users 1. World Bank, 2021a 2. World Bank, 2021a þ 2. Innovation (INN) 3. The number of scientific and technical journals 4. ICT-Innovation interaction 3. World Bank, 2021b 4. World Bank, 2021b þ þ Controls 1. Institutional Quality (IQ) 2. GDPGR 1. Effectiveness of government 2. Gross Domestic Product growth rate 3. World Bank, WGI Database, 2022b 4. World Bank, 2021a þ/− þ 3. Financial Inclusion (FI) Index of usage, barriers and access World Bank Financial Development Database þ 4. Inflation (INF) Annual Consumer Price Index (CPI) WDI – 5. Government Support (GS) The ratio of government expenditures to the total output of the economy WDI þ 6. Economic Development Using the human development index WDI þ 7. Unemployment Rate The number of unemployed individuals by the total labour force and then multiplied by 100 to express it as a percentage. WDI – 8. Population rate The percentage change in the population over a specified period. This is expressed as the annual percentage change in population size. WDI þ COGENT ECONOMICS & FINANCE 7 financial sector development in African nations. When addressing potential endogeneity concerns that arise as a result of simultaneously determining variables in the financial system, GMM is especially useful. By including lagged values of financial sector development (FD) as an explanatory variable, the model accounts for the continued influence of previous progress on subsequent developments. The aforementioned persistence highlights the concept that historical advancements form the basis for continuous enhancements in the financial domain. From Table 7, the coefficient for lagged FD, which is both positive and statistically significant, serves to reinforce the significance of ongoing efforts to facilitate consistent progress in the financial sector to stimulate economic expansion and stability. Consistent with prior research by Thi Thuy and Nguyen Trong (2021) and Voghouei et al. (2011), which emphasise the longterm effects of financial sector reforms on economic development, these results support this notion. In a similar vein, the coefficient for Information Communication Technology (ICT) as shown in Table 7, is both positive and statistically significant, signifies that financial sector development in African nations remains significantly influenced by investments in digital infrastructure. The correlation between ICT and development in the financial sector highlights the profound influence that technological advancements have on areas such as risk management, service provision, and financial inclusion. Through the utilisation of digital technologies, financial institutions can augment the efficiency, accessibility, and inclusivity of the financial system. This, in turn, can make a significant contribution to the advancement of the economy as a whole and to the reduction of poverty. These results are consistent with prior research conducted by Yussif et al. (2019) and Zafar et al. (2022), which underscore the significance of digitalisation in facilitating the modernisation of the financial sector and broadening the availability of financial services. Furthermore, in Table 7, the coefficients associated with other determinants, including Economic Development (ED), Innovation (INN), and Financial Inclusion (FI), which are all positive and statistically significant, underscore the complex and varied characteristics of the factors that support the evolution Table 7. GMM Estimation for Digitisation and other financial sector development determinants in African countries. Dependent variable ¼Financial Sector Development Variables Coefficient FDi,t−10.0295 (0.0079) ICT 0.0301 (0.0082) INN 0.0443 (0.0328) FI 0.340 (0.0676) ED 0.0758 (0.0426) IQ 0.0299 (0.0084) GS 0.0260 (0.0103 IFS 0.0327 (0.0177 GDPGR 0.0468 (0.0244) INF −0.0802 (0.0416 POP 0.239 (0.0719) UEM −0.0212 (0.0073) Hansen J-Statistic 0.435 Sargan Test 0.219 AR (1) 0.054 AR (2) 0.059 Source: Authors’Computation (2023): NB; where ‘FD is the Financial Sector Development, ICT is the information communication technology, INN is the innovation, FI is the financial inclusion, ED is the economic development, IQ is the institutional quality, GS is the government support, IFS is the infrastructure, GDPGR is the Gross Domestic Product growth rate, INF is the inflation rate, POP is the population rate, UEM is the unemployment rate’,, significant at 1% and 5% levels. 14 U. ADAM ET AL. of the financial sector. The determinants in question comprise a variety of elements, such as regulatory frameworks, product innovation, and overall economic development. Each of these components plays a role in improving the efficacy of resource allocation, risk management, and financial intermediation. The correlations that exist between these factors and the development of the financial sector emphasise the significance of cultivating favourable regulatory settings, encouraging the introduction of novel financial products, and fostering comprehensive economic expansion to bolster strong financial sector development. The results of this study align with previous investigations conducted by Zafar et al. (2022) as well as Ziberi et al. (2021), which underscore the interrelatedness of multiple elements that influence the dynamics of the financial sector. On the other hand, the negative coefficient associated with the inflation rate (INF) indicates that expansions in inflationary expectations could potentially hinder the progress of the financial sector. This finding emphasises the significance of maintaining price stability as a macroeconomic policy goal, given that elevated inflation volatility has the potential to erode financial stability and long-term development prospects. Monetary policy frameworks that are efficient in their pursuit to contain inflationary pressures are critical in preserving an economic environment that is stable and conducive to the growth and stability of the financial sector. The results of this study are consistent with established theoretical frameworks, including the finance-inflation nexus, which Yussif et al. (2019) and Tchamyou and Asongu (2017) discuss. This nexus emphasises the adverse effects that inflation volatility has on both long-term development prospects and financial stability. Conclusion This study contributes to the existing literature on the determinants of financial sector development by providing a comprehensive analysis of the factors that contribute to the development of the financial sector. The study highlights the importance of digitisation, financial inclusion, economic development, institutional quality, government support, and infrastructure in promoting the growth and development of the financial sector. The study’s findings are consistent with previous research, which emphasizes the implications of digitisation for financial development. The study also highlights the importance of economic development in driving the demand for financial services and the development of the financial sector. Institutional quality is another critical determinant of financial sector development. The study emphasizes that strong legal and regulatory institutions are essential for creating a stable and predictable environment for financial transactions to take place, reducing information asymmetry and lowering transaction costs, which are crucial for the development of a robust financial sector. In sum, given the study’s main objective which is to examine whether digitisation determines financial development in African countries, the studies identified digitisation as a key determinant of financial development in Africa. The results indicate that digitalisation can help to increase financial inclusion, reduce transaction costs, and promote the development of new financial products and services, all of which can contribute to improving financial sector development. The findings also suggest that other factors, such as financial inclusion, economic development, institutional quality, government support, and infrastructure, are important for the development of the financial sector and should be addressed in conjunction with digital adoption. Policymakers in Africa should take note of these findings and work to create an enabling environment that supports digitisation -financial sector development. Efforts to improve institutional quality, governance, and infrastructure can help to create a more conducive environment for financial development. Overall, the studies suggest that digitalisation has the potential to complement financial sector development in Africa and other regions, and can create an outburst of opportunities in the financial sector in terms of integrating financial systems, reducing financial risk and enhancing investment finance. Recommendation Theoretical implication The theoretical implications of the empirical results concerning the significant coefficients linked to Information Communication Technology (ICT), Innovation (INN), Financial Inclusion (FI), and Economic Development (ED) are of utmost importance in comprehending the financial sector development in COGENT ECONOMICS & FINANCE 15 African nations. The transformative impact of digital technologies on financial systems and the promotion of inclusive growth is highlighted by the positive and statistically significant coefficient associated with ICT. This is consistent with technological determinism that asserts progress in information and communication technologies is the primary catalyst for societal and economic transformations (Taiminen & Karjaluoto, 2015). Moreover, it aligns with the notion of the digital divide, which underscores the criticality of narrowing technological access disparities to advance fair and balanced development (Raza et al., 2014). Through the utilisation of information and communication technology (ICT), financial institutions can improve operational effectiveness, diminish transaction expenses, and extend services to marginalised communities, thus promoting increased financial inclusion and economic empowerment (Taiminen & Karjaluoto, 2015). Additionally, the noted importance of the INN coefficient emphasises the pivotal function that innovation plays in driving the progress of the financial sector. This is consistent with theories concerning the diffusion and adoption of innovations, which posit that competitive advantages and productivity gains can result from the adoption of novel practices and technologies (Rahman et al., 2023). Moreover, it aligns with Schumpeter’s creative destruction theory, a concept that underscores the significance of innovation in upsetting established economic frameworks and propelling sustained economic expansion (Rani et al., 2023). Financial institutions can enhance their risk management practices, facilitate financial inclusion, and stimulate economic growth by cultivating an environment that encourages innovation and adopting disruptive technologies like fintech and blockchain. Practical implication The practical implications of the coefficients that were observed within the framework of Economic Development (ED), Information Communication Technology (ICT), Innovation (INN), and Financial Inclusion (FI) provide policymakers, financial institutions, and other stakeholders with valuable insights into how to promote the development of the financial sector in African nations. First, the positive coefficient linked to ICT implies that allocating resources towards digital infrastructure development and encouraging the utilisation of digital financial services could result in substantial advantages in terms of enhancing financial accessibility and streamlining financial transactions. Prioritising initiatives that promote digital literacy, facilitate greater financial inclusion, and enhance the accessibility of financial services for underserved populations are all viable approaches for policymakers to pursue. Such initiatives may also include providing incentives for the development of digital payment systems. Furthermore, the INN coefficient’s observed significance underscores the criticality of cultivating an innovative culture in the financial industry to propel progress in service provision, product assortment, and operational effectiveness. By connecting the potential of technologies like artificial intelligence, blockchain, and machine learning, financial institutions can create inventive resolutions that cater to the distinct requirements and inclinations of customers, enhance risk management methodologies, and optimise operational procedures. Financial institutions can distinguish themselves in a highly competitive market, draw in fresh clientele, and generate value for stakeholders through the adoption of innovative practices. Furthermore, it is crucial to emphasise the significance of implementing focused policies and initiatives that facilitate enhanced access to formal financial services for underserved and marginalised populations, as indicated by the substantial coefficient associated with Financial Inclusion (FI). Policymakers may wish to direct their attention towards measures such as augmenting the scope of banking infrastructure, endorsing initiatives that foster financial literacy, and facilitating the provision of accessible and affordable financial products and services to small businesses and low-income individuals. Through the prioritisation of financial inclusion, policymakers and financial institutions can facilitate the economic realisation of latent communities, mitigate income inequality, and make substantial contributions to the social and economic progress of African nations as a whole. Author Contributions UA: Wrote the introduction of the paper and also conducted the analysis and interpretation of the data. ALS: Performed a literature search and reviewed all the literature in the study. MSSS: Conducted or worked on the 16 U. ADAM ET AL. methodology section of the paper. MMY: Critically revised the paper for intellectual content and worked on the final approval version for submission. All the aforementioned authors collectively agreed to be accountable for all aspects of the work. Disclosure statement No potential conflict of interest was reported by the author(s). Funding The study received no funding and is the sole work of the authors. About the authors Umar Adam is with the Department of Agriculture and Food Economics, University for Development Studies, Ghana. He holds Bachelor of Commerce with Specialization in finance and MPhil Agricultural Economics. His research interests revolve around macroeconomics, time series analysis, development economics, financial sector development, agricultural economics, international trade, monetary policy and financial markets. Abdul Latif Sulemena is an Accountant at Ghana Education Service. He holds BA Integrated Business Studies with specialization in Accounting and a Postgraduate student (MSc Accounting and Finance at Kwame Nkrumah University of Science and Technology). His area of research includes financial market, corporate governance and ethics, corporate finance and digital marketing. Mohammed Shamsudeen Sandow Sule is with the Treasury Unit of the Directorate of Finance at the University for Development Studies. He is a professional accountant with eight years of experience. He holds Bachelor of Commerce with Specialization in Finance and MBA Accounting and Finance. His area of research includes assets pricing, corporate governance, financial development and international trade. Mohammed Mudasir Yussif is a lecturer at the Department of Finance, School of Business, University for Development Studies. He holds BA Integrated Development Studies with option in Economics, MSc Finance and Economics, MPhil Agricultural Economics. He is currently pursing PhD in Development Finance at University for Development Studies in Ghana. His area of research includes financial sector development, digitisation, development economics, food Security among many others. ORCID Umar Adam http://orcid.org/0000-0002-4731-7182 Data availability statement The study used publicly available data from WDI and Trading Economics which is available on their respective websites. However, the authors are ready to make the data and any materials associated with the paper available to anyone upon reasonable request. References Alagidede, I. P., Ibrahim, M., & Sare, Y. A. (2020). Structural transformation in the presence of trade and financial integration in sub–Saharan Africa. Central Bank Review,20(1), 21–31. https://doi.org/10.1016/j.cbrev.2020.02.001 Asongu, S. A., & Nwachukwu, J. C. (2019). ICT, financial sector development and financial access. 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