Us a z, Yazidu; Fan a, Ashena i Beyene
A icle
Financial de elopmen and economic g ow h in sub-
Saha an A ica: A sec o al pe spec i e
Cogen Economics & Finance
P o ided in Coope a ion wi h:
Taylo & F ancis G oup
Sugges ed Ci a ion: Us a z, Yazidu; Fan a, Ashena i Beyene (2021) : Financial de elopmen and
economic g ow h in sub-Saha an A ica: A sec o al pe spec i e, Cogen Economics & Finance, ISSN
2332-2039, Taylo & F ancis, Abingdon, Vol. 9, Iss. 1, pp. 1-21,
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Financial de elopmen and economic g ow h in
sub-Saha an A ica: A sec o al pe spec i e
Yazidu Us a z & Ashena i Beyene Fan a |
To ci e his a icle: Yazidu Us a z & Ashena i Beyene Fan a | (2021) Financial de elopmen and
economic g ow h in sub-Saha an A ica: A sec o al pe spec i e, Cogen Economics & Finance,
9:1, 1934976, DOI: 10.1080/23322039.2021.1934976
To link o his a icle: h ps://doi.o g/10.1080/23322039.2021.1934976
© 2021 The Au ho (s). This open access
a icle is dis ibu ed unde a C ea i e
Commons A ibu ion (CC-BY) 4.0 license.
Published online: 07 Jun 2021.
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GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE
Financial de elopmen and economic g ow h in
sub-Saha an A ica: A sec o al pe spec i e
Yazidu Us a z
1
* and Ashena i Beyene Fan a
1
Abs ac : Resea ch on he impac o inancial de elopmen on economic g ow h
emains inconclusi e. P e ious empi ical examina ion o he link is based on
agg ega e GDP on he p esump ion ha each economic sec o esponds iden ically
o inancial de elopmen . Howe e , he ex en o c edi u ilisa ion, as well as
p oduc i i y o c edi , may no necessa ily emain he same ac oss sec o s. This
s udy he e o e seeks o con ibu e o he li e a u e by examining he e ec o
inancial de elopmen ac oss sec o s in sub-Saha an A ica using he Gene alised
Me hod o Momen s (GMM) o e he pe iod 1990–2018. Indeed, he indings show
ha while inancial de elopmen has a posi i e e ec on he se ice and ag icul-
u al sec o s, a ce ain h eshold o inancial de elopmen mus be eached be o e i
can posi i ely con ibu e o he g ow h o he indus ial sec o . The indings a e
obus o a di e en es ima ion echnique. Wi h he indus ial sec o conside ed
c i ical o economic ans o ma ion, ou indings imply ha policymake s in sub-
Saha an A ica need o con inue o p omo e inancial de elopmen o spu
indus ializa ion.
Subjec s: Economics; Finance; Business, Managemen and Accoun ing
Keywo ds: inancial de elopmen ; h eshold; gene alised me hod o momen s; seemingly
un ela ed eg ession; sub-Saha an A ica
ABOUT THE AUTHOR
M Yazidu Us a z is a PhD candida e a he
Uni e si y o S ellenbosch Business School,
Sou h A ica. He is also a lec u e a he
Uni e si y o De elopmen S udies in Ghana. M
Us a z holds an MPhil deg ee in Finance om he
Uni e si y o Ghana Business School. His
esea ch in e es s include inancial de elop-
men , ola ili y and o eign capi al in lows.
D Ashena i Beyene Fan a is a Senio Lec u e o
De elopmen Finance a he Uni e si y o
S ellenbosch Business School. D Fan a has pub-
lished widely in a numbe o schola ly jou nals
and has deli e ed pape s a in e na ional con-
e ences. His esea ch in e es s include inancial
de elopmen , SME inance, inancial inclusion
and co po a e go e nance. D Fan a holds
a doc o al deg ee in Social and Economic
Sciences (Co po a e Finance) om he Johannes
Keple Uni e si y o Linz in Aus ia and
a Mas e ’s deg ee in Accoun ing and Finance
om Addis Ababa Uni e si y in E hiopia.
PUBLIC INTEREST STATEMENT
The inance–g ow h nexus has been ex ensi ely
examined wi hin he con ex o sub-Saha an
A ica. The esul s, howe e , emain complex and
inconclusi e. This pape seeks o con ibu e o he
li e a u e by examining whe he he impac o
inancial de elopmen in sub-Saha an A ica a -
ies ac oss di e en sec o s o he economy. The
indings show ha inancial de elopmen has
a posi i e impac on he g ow h o he se ice and
ag icul u al sec o s. In he case o he indus ial
sec o , he ini ial impac is nega i e, bu becomes
posi i e a e eaching a ce ain h eshold. The
esul s sugges ha policymake s in sub-Saha an
A ica need o con inue o p omo e inancial
de elopmen o spu indus ialisa ion.
Us a z & Fan a, Cogen Economics & Finance (2021), 9: 1934976
h ps://doi.o g/10.1080/23322039.2021.1934976
Page 1 o 21
Recei ed: 8 Decembe 2020
Accep ed: 24 May 2021
*Co esponding au ho : Yazidu Us a z,
S ellenbosch Uni e si y Business
School, Ca l C onje D i e, Bell ille 7530,
Cape Town, Sou h A ica
E-mail: [email p o ec ed]
Re iewing edi o :
Wai Ching Poon, Economics, Monash
Uni e si y - Malaysia Campus,
MALAYSIA
Addi ional in o ma ion is a ailable a
he end o he a icle
© 2021 The Au ho (s). This open access a icle is dis ibu ed unde a C ea i e Commons
A ibu ion (CC-BY) 4.0 license.
1. In oduc ion
The inance–g ow h nexus has long been a subjec o in e es among p ac i ione s and policy-
make s (Aca a ci, 2009; Elijah & Hamza, 2019; Ib ahim & Alagidede, 2018; Nyasha & Odhiambo,
2017). The pe sis en in e es may be due o he impo an ole ha inance plays in p opelling
g ow h; by mobilising excess liquidi y in he sys em and alloca ing i o he mos p oduc i e sec o s
o he economy in he mos e icien manne (Ahmed & Wahid, 2011; Du usu-ci ci e al., 2017).
Howe e , a e decades o ex ensi e s udies on he subjec , he ela ionship be ween inance and
g ow h emains inconclusi e (An e al., 2020; Deb e al., 2019; He wa z & Walle, 2014; Sehgal
e al., 2012). Nyasha and Odhiambo (2019) desc ibed he ela ionship as complex and poin ed ou
ha he esul s a ied depending on coun y-speci ic ac o s, he empi ical model used, and he
measu e o inancial de elopmen . Ano he ac o ha could accoun o he mixed esul s, bu
which has no been well esea ched, is he possibili y ha he impac o inancial de elopmen on
g ow h could a y ac oss di e en sec o s o he economy.
While a en ion has been gi en o he ela ionship be ween inancial de elopmen and g ow h,
li le is known abou he impac o inancial de elopmen on sec o al g ow h. Examining he impac
o sec o al g ow h is mo e help ul han looking a he agg ega e g ow h as di e en sec o s could
ha e di e en in ensi ies o inancial demands and p oduc i i y. Besides, policies on g ow h a e
ini ia ed a he sec o al le el, hence s udying he impac o inancial de elopmen a he sec o al
le el would be a handy ool o in o m sec o -le el policies. Indeed, c edi alloca ion has a ied
signi ican ly ac oss di e en sec o s o he economy, wi h he ag icul u al sec o being he mos
nega i ely a ec ed despi e he sec o ’s con ibu ion o employmen and li elihoods. Acco ding o he
Alliance o a G een Re olu ion in A ica (2017), he sha e o o al c edi o ag icul u e in sub-Saha an
A ica was less han 1%. Financial ins i u ions p e e o lend o he non-ag icul u al sec o as hey
pe cei e ag icul u al ac i i ies o be oo isky and he cos o ex ending c edi is high as a esul o
mul iple low- olume ansac ions. The si ua ion is signi ican ly he same ac oss coun ies. Fo
ins ance, c edi alloca ed o he ag icul u al sec o in Ghana o June 2019 was abou 4% compa ed
o 22% o he se ice sec o (Bank o Ghana, 2019). E en in coun ies whe e ag icul u e’s con ibu ion
o GDP is o e 50%, c edi o he sec o is skewed in a ou o he ade sec o which ecei es abou
38% compa ed o 4.1% o he ag icul u al sec o (Cen al Bank o Libe ia, 2019). Fu he , in Bu undi,
he a e is less han 5% compa ed o 60% in he anspo sec o (A ican De elopmen Bank, 2019).
Hence, he impac o inancial de elopmen could a y ac oss di e en sec o s o he economy.
Ano he poin wo h no ing is he ac ha he p oduc i i y o capi al could a y ac oss he sec o s.
The e u n on in es ible p ojec s could dic a e which sec o ecei es mo e c edi . Acco ding o he
G ow h Resea ch P og amme (2015), he ag icul u al sec o in sub-Saha an A ica is cha ac e ised by
low p oduc i i y owing o low e u ns and pe pe ual isk o ha es ailu e. This ulne abili y is due o
he sec o ’s hea y eliance on ain which could ail and hence a ec he ou come o any in es men .
In con as , he se ice and indus ial sec o s may a ac good p ojec s and he en i onmen may
p o e mo e conduci e o such p ojec s. Some ha e howe e a gued ha he se ice and indus ial
sec o s a e capi al in ensi e and he e o e he le el o inancial de elopmen would ha e o be highe
o ealise a posi i e e ec on g ow h (see, o example, Daway-Ducanes & Gochoco-Bau is a, 2019).
This s udy seeks o con ibu e o he li e a u e on he ela ionship be ween inance and g ow h in
sub-Saha an A ica on wo le els. Fi s , p e ious s udies (see, o ins ance, Aluko e al., 2020; An e al.,
2020; Ho & Iyke, 2020; Ib ahim & Alagidede, 2018) ocused on he impac o inancial de elopmen on
agg ega e g ow h. This s udy complemen s exis ing li e a u e by examining he impac o inancial
de elopmen on sec o al g ow h. Though he e a e some s udies wi h a ocus on sec o al g ow h, hey
ely ei he on a single measu e o inancial de elopmen o a e coun y-speci ic ( o example, Asaleye
e al., 2018; Daway-Ducanes & Gochoco-Bau is a, 2019; Ogbonna e al., 2020; Oliynyk-Dunn, 2017).
This is signi ican because his s udy a gues ha he impac o inancial de elopmen on g ow h may
a y ac oss di e en sec o s o he economy. Hence, he e idence based on sec o al g ow h could
help policymake s in shaping sec o -speci ic policies aimed a enhancing he g ow h o a ious
sec o s. Second, he s udy seeks o con ibu e by employing he newly cons uc ed inancial de el-
opmen index de ised by S i ydzenka (2016) o assess he ela ionship be ween inancial
Us a z & Fan a, Cogen Economics & Finance (2021), 9: 1934976
h ps://doi.o g/10.1080/23322039.2021.1934976
Page 2 o 21
de elopmen and sec o al g ow h in he con ex o sub-Saha an A ica. The index is a comp ehensi e
measu e o inancial de elopmen inco po a ing banking, s ock ma ke , insu ance, mu ual und,
pension und indica o s, among o he s. The inancial sec o has e ol ed beyond banking and s ock
ma ke s (S i ydzenka, 2016). The e o e, he index be e e lec s he ac i i ies o inancial in e media-
ion in an economy ela i e o using a single measu e. Measu ing inancial de elopmen has been an
un esol ed issue in he li e a u e. How o accu a ely and comp ehensi ely measu e inancial de el-
opmen is c ucial o policymaking because he choice o measu emen could esul in a di e en
impac on g ow h, leading o a misleading policy p esc ip ion (Demi guc-Kun & Maksimo ic, 2002).
The s udy is he e o e o signi icance o policymake s and p ac i ione s in a numbe o ways.
The es o he a icle is o ganised as ollows: sec ion 2 p esen s a e iew o ele an li e a u e,
ollowed by sec ion 3 which desc ibes he me hodology used, da a and da a sou ces. Sec ion 4
p esen s esul s and analysis, while conclusions and policy implica ions a e p o ided in he las sec ion.
2. Re iew o li e a u e
Ex ensi e heo e ical and empi ical li e a u e on he impac o inancial de elopmen on economic
g ow h exis s (Mu a i, 2017). Chuah and Thai (2004) iden i ied ou main lines o a gumen in he
heo e ical li e a u e on he ela ionship be ween inance and g ow h.
The i s line o a gumen led by Schumpe e (1934) asse ed ha inance has a posi i e impac on
g ow h by inancing inno a i e ideas. McKinnon (1973) and Shaw (1973) de eloped a amewo k
wi hin which he inancial sec o inc eases g ow h by aising sa ings and in es men . To achie e his,
hey called o libe alisa ion o in e es a es and, as he eal in e es a e inc eases, he incen i e o
sa e also inc eases. Gu ley and Shaw (1955) highligh ed he ole o inancial ins i u ions in di ec ing
su plus uni s o de ici uni s o p omo e g ow h. Benci enga and Smi h (1991) de eloped an endo-
genous equilib ium model in which he ole o he bank is cen al in inancial in e media ion. They
a gued ha inancial in e media ion a ec s g ow h h ough in es men , whe e banks mobilise and
di ec sa ings in o p oduc i e in es men . King and Le ine (1993) complemen ed his a gumen by
explaining he ole o inance in g ow h h ough an endogenous g ow h model. They a gued ha
inancial ins i u ions help g ow h by sc eening po en ial p ojec s o en ep eneu s and, h ough
inancial in e media ion, mobilise inance o suppo he mos p oduc i e economic ac i i ies and
di e si ying he isk associa ed wi h hese economic ac i i ies.
The second a gumen is he demand- ollowing hypo hesis which s a es ha i is economic
g ow h a he han inancial de elopmen ha leads o he eme gence and de elopmen o he
inancial sec o . This iew was in oduced by Robinson (1952), who a gued ha expansion in
economic ac i i ies wi hin an economy necessi a es he p esence o inancial ins i u ions o
p o ide se ices essen ial o economic g ow h. Hence, g ow h leads, and inance ollows.
The hi d s andpoin sough o combine he wo a gumen s abo e and sugges ed he exis ence
o a mu ual ela ionship be ween inance and g ow h. Pa ick (1966) pu o wa d he s ages o
a de elopmen hypo hesis whe e inance ini ially spu s economic g ow h, as sugges ed by he
inance-leading o supply hypo hesis. As g ow h is enhanced h ough expansion in economic
ac i i ies, g ow h hen suppo s inance, ollowing he demand-leading hypo hesis. This posi ion
is suppo ed by G eenwood and Jo ano ic (1990) who a gued ha he e is an inex icable link
be ween inance and g ow h. They explained ha a he ini ial s age o de elopmen , he in e -
media ion unc ion played by inance p omo es g ow h by encou aging a highe e u n on capi al.
A a la e s age, he esul an g ow h suppo s he expansion o he inancial s uc u e. The inal
line o a gumen led by Lucas (1988) sough o sugges ha he ole o inance in he g ow h
p ocess has been o e s e ched and, hence, he impac o inance on g ow h is negligible.
The empi ical li e a u e on he inance–g ow h ela ionship has been examined a he coun y and
c oss-coun y, le els. E idence om ea lie s udies es ablished a linea and posi i e ela ionship
be ween inancial de elopmen and g ow h (Benczú e al., 2019). Goldsmi h (1959) made
Us a z & Fan a, Cogen Economics & Finance (2021), 9: 1934976
h ps://doi.o g/10.1080/23322039.2021.1934976
Page 3 o 21

a pionee ing con ibu ion o he empi ical examina ion o he inance–g ow h nexus. Using a sample
o 35 coun ies, he ound a posi i e co ela ion be ween inance and g ow h. Recen s udies also
ein o ce he posi i e impac o inance on g ow h ( o example, Tü soy & Faisal, 2018; Lenka &
Sha ma, 2020; Sh a ani & Sha ma, 2020; Zeqi aj, Hammouhdeh, Iskende oglu & Tiwa i, 2020). The e
a e, howe e , a ew s udies ha ha e es ablished ei he a nega i e o no ela ionship be ween inance
and g ow h. Fo ins ance, Na ayan and Na ayan (2013) in a s udy o 65 coun ies ac oss di e en
egions in he wo ld ound bank c edi o ha e a nega i e e ec on g ow h while he s ock ma ke did
no ha e any signi ican impac on g ow h. Fu he , Ayadi e al. (2013) ocused on 11 Medi e anean
coun ies o e he pe iod 1985–2009. These au ho s ound he banking sec o o be nega i ely ela ed
o economic g ow h. They, howe e , a ibu ed he nega i e impac o he weak egula o y sys em.
O he s udies epo ed he impac o inance on g ow h o a y depending on he s uc u e o
he inancial sys em, ha is whe he he inancial sys em was a bank o ma ke domina ed. One o
he ea lies s udies in his espec was A je and Jo ano ic (1993), who ound he s ock ma ke
a he han he banking sec o o ha e a posi i e impac on g ow h. Howe e , hei sample
con ained bo h de eloped and de eloping coun ies. A line o s udies has subsequen ly been
done o con i m whe he a ma ke -based o bank-based inancial sys em p omo es g ow h ( o
example, Boadi e al., 2019; Ib ahim e al., 2017; Lee, 2012; Mahmood & Rehman, 2019). The
e idence p o ided by Lee (2012) demons a ed ha , hough he ound he s ock ma ke o d i e
g ow h in coun ies ha a e ma ke -based and he banking sec o o d i e g ow h in bank-based
coun ies, he banking sec o a ec s g ow h posi i ely a he ea ly s ages o de elopmen , while
he s ock ma ke akes o e as he economy ad ances. The s udy by Ib ahim e al. (2017) poin ed
o a signi ican posi i e e ec o bo h banks and he s ock ma ke in d i ing g ow h. Thei samples
we e howe e a mix u e o bo h de eloped and de eloping coun ies.
In a ela ed s udy o 17 Eu opean coun ies o e he pe iod 1970–2013, Mahmood and Rehman
(2019) epo ed bo h bank and ma ke indica o s o posi i ely a ec g ow h, bu he impac o bank
de elopmen was mo e pe sis en ela i e o he s ock ma ke . In ano he s udy, Boadi e al. (2019),
using a sample o 60 coun ies, ound suppo o he hypo hesis ha a ma ke -based inancial
sys em d i es g ow h ela i e o he banking sec o . Ye , some ound he impac o inancial de el-
opmen on g ow h o a y based on income le els (see, o ins ance, Bis & Read, 2018; Deidda &
Fa ouh, 2002; Kim e al., 2012; Nguyen e al., 2019; Rahman e al., 2020; Sehgal e al., 2012). Sehgal
e al. (2012) disagg ega ed hei samples in o lowe -, middle- and uppe -income coun ies. They
ound he banking sec o o d i e g ow h ac oss he h ee income g oups, while he s ock ma ke only
d i es g ow h in he middle- and uppe -income coun ies. Simila ly, Nguyen e al. (2019) iden i ied he
insu ance sec o o posi i ely a ec g ow h ac oss income g oups wi h he s ock ma ke only ha ing
a posi i e e ec in middle- and uppe -income coun ies. They howe e es ablished he e ec o he
banking sec o on g ow h o be nega i e ac oss income g oups, whe e hey sugges ed ha c edi
ex ended could ha e been u ilised on consump ion ins ead o g ow h-enhancing p ojec s.
Fu he , some s udies mo ed beyond he ela ionship o examine he possibili y o a causal ela ion-
ship be ween inance and g ow h, ollowing Pa ick’s (1966) demand- ollowing and supply-leading
hypo hesis, bu he esul s we e mixed. In ea lie s udies, Calde ón and Liu (2003) ound inance a he
o cause g ow h, while Ang and Mckibbin (2007) es ablished causali y unning om g ow h o inance.
Hsueh e al. (2013) no ed ha he di ec ion o causali y was sensi i e o he choice o inancial
de elopmen a iable, and while hey ound domes ic c edi o obus ly lead g ow h, g ow h a he
led when money supply measu es we e used in some cases. P adhan e al. (2017), using di e en
indica o s, poin ed o a mixed causal ela ionship. They es ablished a uni-di ec ional causali y unning
om g ow h o inance when a banking indica o was used, while a bi-di ec ional causali y was
es ablished in he case o s ock ma ke , bond, and insu ance ma ke indica o s. Deb e al. (2019)
disagg ega ed hei samples in o de eloped and eme ging economies using qua e ly da a o e he
pe iod 1993–2014. Thei esul s showed ha in de eloped economies, inance d i es g ow h in line wi h
he supply-leading hypo hesis, while he demand- ollowing hypo hesis a he exis s in he case o
eme ging economies. Dash e al. (2020), using bo h insu ance and bank de elopmen indica o s,
Us a z & Fan a, Cogen Economics & Finance (2021), 9: 1934976
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Page 4 o 21
p o ided e idence o long- un causali y be ween inancial de elopmen and g ow h. In he sho un,
hey ound a bi-di ec ional ela ionship be ween insu ance and g ow h and hen again in banking and
g ow h. They a gued ha a de eloped insu ance indus y helps in o e coming economic shocks while
expansion in he economy leads o inc ease in income le els and, hence, an inc ease in demand o
insu ance.
The new pa adigm in li e a u e, howe e , sugges s ha he ela ionship be ween inance and
g ow h could be non-linea . In an in luen ial pape , Cecche i and Kha oubi (2012) es ablished ha
inance has a posi i e impac on g ow h only up o a poin , beyond which he impac o inance on
g ow h becomes nega i e. This is known as he “ oo much inance” hypo hesis. These au ho s
asse ed ha he inancial sec o does no exis in isola ion bu a he compe es wi h o he sec o s
o he economy o sca ce esou ces. Thus, as inancial de elopmen inc eases, i begins o dep i e
he o he sec o s o he needed esou ces, and hus he nega i e e ec . Subsequen ly, se e al ela ed
s udies ha e been done in his di ec ion, bu wi h di e en app oaches in es ima ing he h eshold
le els. While Soeda mono e al. (2017) used he squa e o inancial de elopmen a iable as
a measu e o a h eshold, Ta iq e al. (2020) employed he s a ic Hansen’s h eshold model in hei
s udy on Pakis an. Howe e , he indings o bo h s udies we e mixed, whe eas Soeda mono e al.
(2017) showed ha he e ec o inance is posi i e bu u ns nega i e a e a aining a ce ain
h eshold. Con a y o he oo much inance hypo hesis, Ta iq e al. (2020) ound he impac o
inance o be ini ially nega i e bu ha i only becomes posi i e a e a aining a ce ain h eshold.
Swamy and Dha ani (2019) employed bo h he squa e e m and Hansen’s h eshold model in
a sample o 24 de eloped coun ies o he pe iod 1983–2013. They showed ha abo e a h eshold
o 124%, he impac o inance on g ow h is nega i e. Law and Singh (2014) and Sama gandi e al.
(2015) used he K eme e al. (2013) dynamic h eshold model, which is an ex ension o Hansen’s
s a ic model. The indings o bo h s udies suppo ed he oo much inance hypo hesis. In a me a-
analysis s udy by Bijlsma e al. (2018) co e ing 68 empi ical s udies, hey concluded ha he impac
o inance on g ow h is posi i e bu dec eases o e ime in line wi h he oo much inance hypo hesis.
O he s udies ha e also looked a he impac o inancial de elopmen a a sec o al le el. Mos o
he s udies we e howe e conduc ed a coun y le el and only examined a single sec o . Fo ins ance,
Shahbaz e al. (2013) and Oliynyk-Dunn (2017) ound he impac o inancial de elopmen on he
ag icul u al sec o o be posi i e in Pakis an and Uk aine. The s udy by Topcu and Çoban (2017)
examined he causal ela ionship be ween inance and he indus ial sec o in Tu key and hei
indings suppo he supply-leading hypo hesis. A ecen s udy by Daway-Ducanes and Gochoco-
Bau is a (2019) add essed he ole o inance in he g ow h o he se ice and manu ac u ing sec o s
using a sample o 77 de eloping coun ies. They es ablished a non-linea ela ionship in bo h sec o s,
wi h he impac o inance becoming posi i e only a e a aining a ce ain h eshold. They a gued
ha because o he ini ial la ge and lumpy in es men needed in hese sec o s, he le el o inancial
de elopmen would ha e o ise o a ce ain poin be o e posi i e esul s could be ealised.
In he sub-Saha an A ican con ex , di e en aspec s o he inance–g ow h nexus ha e been
examined ei he a he coun y le el (Elijah & Hamza, 2019; Ho & Iyke, 2020) o c oss-coun y le el
(An e al., 2020; Walle, 2014). Table 1 p esen s a summa y o some o he ecen empi ical s udies
in A ica. The conclusions d awn by mos o he s udies show ha inance has a posi i e impac on
g ow h. Some s udies, including Ahmed and Wahid (2011) and Nyasha and Odhiambo (2017), also
add essed he issue o inancial s uc u e. A g oup o s udies u he looked a he possibili y o
causal ela ionships ( o example, Aluko e al., 2020; Okunlola e al., 2020), bu he esul s we e
mixed. In addi ion, some s udies examined he non-linea ela ionship (see, o ins ance, Ib ahim
& Alagidede, 2018; Taiwo, 2020). Howe e , he exis ing s udies ha e la gely ocused on agg ega e
g ow h wi h li le e idence on whe he he impac o inance could a y ac oss di e en sec o s o
he economy. A no able excep ion is Asaleye e al. (2018) and Ogbonna e al. (2020). While
Asaleye e al. (2018) only looked a he manu ac u ing sec o in Nige ia, Ogbonna e al. (2020)
disagg ega ed hei g ow h measu e in o oil and non-oil g ow h.
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3. Ma e ials and me hod
3.1. Theo e ical model
The s udy adop ed he endogenous g ow h model ollowing he amewo k p oposed by Pagano
(1993). The endogenous g ow h model elaxes he abso p ion o he exogenei y assump ion o he
neoclassical g ow h heo y. The s a ing poin o he model is he simple AK model speci ied as:
Y ¼AK (1)
Whe e Y is he agg ega e ou pu in a linea unc ion o agg ega e capi al s ock (K ) and A cap u es
he p oduc i i y o capi al. The model u he assumes ha a single good is p oduced in he
economy and hence capi al can ei he be in es ed o consumed. I in es ed, capi al is expec ed
o dep ecia e a he a e δ pe pe iod gi en a le el o g oss in es men , I :
I ¼K 11δð ÞK (2)
The model u he assumes a closed economy wi h no go e nmen in e en ion; hence he capi al
ma ke is a equilib ium whe e g oss sa ings S
ð Þequals g oss in es men I
ð Þ. Also, a p opo ion o
sa ings 1  ;ð Þ is los in he inancial in e media ion p ocess, ep esen ing he cos o inancial
in e media ion such as bank cha ges, ees o b oke s and deale s, among o he s. The emaining
amoun is success ully channeled in o in es men as:
;S ¼I (3)
F om equa ion 1, he g ow h a e a ime þ1 is gi en as:
g þ1¼Y þ1
Y 1¼K þ1
K 1 (4)
D opping he ime indices om equa ion 2, he s eady-s a e g ow h a e can be exp essed in he
inal model as:
g¼AI
Yδ¼A;sδ(5)
Pagano (1993) hen iden i ied h ee ways by which inancial de elopmen could a ec g ow h:
i s , inance can a ec g ow h by aising he p opo ion o sa ings, ;which is expec ed o be
channeled in o in es men . Second, i can inc ease he social ma ginal p oduc i i y o capi al A;
and, hi d, i can a ec g ow h by inc easing he a e o p i a e sa ings, s.
3.2. Empi ical model
In line wi h he heo e ical model, he s udy speci ied he models o be es ima ed as:
SVAi ¼βSGi 1þ;FDi þαXi þφiþei (6)
IVAi ¼βIGi 1þ;FDi þαXi þφiþei (7)
AVAi ¼βAGi 1þ;FDi þαXi þφiþei (8)
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Table 1. A summa y o ecen s udies on he ela ionship be ween inance and g ow h in Sub-
Saha an A ica
Au ho (s) Type o s udy Econome ic
model used
Numbe o
coun ies
A measu e o
inancial
de elopmen
Summa y o
indings
Ahmed and
Wahid (2011)
Panel
(1986–2007)
FMOLS 7 alue o sha es
aded, p i a e
c edi and s ock
ma ke
capi aliza ion.
S ock ma ke
posi i ely
a ec s g ow h
h ough
e iciency and
p oduc i i y
while he
banking
ins i u ion
impac s g ow h
h ough capi al
accumula ion.
Deme iades
and James
(2011)
Panel
(1975–2006)
Wes e lund
coin eg a ion
18 Bank deposi ,
liquid liabili y
and p i a e
c edi .
E idence o
demand-led
hypo hesis.
Walle (2014) Panel
(1975–2005)
Wes e lund
coin eg a ion
and DOLS
17 Liquid liabili y
and p i a e
c edi ,
A long- un
ela ionship
exis s and
causali y
unning om
inance o
g ow h.
Aca a ci, Oz u k
and Aca a ci
(2009)
Panel
(1975–2005)
GMM and
Ped oni
coin eg a ion
24 Domes ic c edi
by he banking
sec o , p i a e
c edi and liquid
liabili y.
The di ec ion o
causali y
depends on he
measu e o
inancial
de elopmen .
Aluko e al.
(2020)
Panel
(1990–2015)
Dumi escu and
Hu lin (2012)
panel causali y
es model
33 Financial
de elopmen
index
Bidi ec ional
ela ionship
be ween
inance and
g ow h.
An e al. (2020) Panel
(1985–2015)
FE and RE
models. G ange
causali y es
30 Liquid liabili y,
b oad money
supply,
domes ic c edi
by banks o
p i a e sec o
and in e es
ead sp ead
The di e ence
depends on he
income;
nega i e impac
in coun ies wi h
low income
while i is
posi i e in he
case o highe -
income
coun ies.
Elijah and
Hamza (2019)
Timese ies
(1981–2015)
VECM Nige ia B oad money
supply,
Exis ence o
posi i e long-
un ela ionship
bu u ns
nega i e a e
accoun ing o
a s uc u al
b eak.
(Con inued)
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espec i ely. The es ima ed h esholds we e 67% o he se ice sec o and 39% o he ag icul u al
sec o , which a e highe compa ed o inancial de elopmen . This is o be expec ed gi en ha
inancial in e media ion in sub-Saha an A ica is bank-d i en ela i e o he s ock ma ke . Abo e
hese h esholds, an inc ease in inancial de elopmen by 1% led o an inc ease in se ice g ow h by
0.28% and 0.50% o he ag icul u al sec o . Simila ly, he impac o inancial ins i u ions on indus y
was nega i e, while hei squa e showed a posi i e ela ionship. An inc ease in he le el o inancial
ins i u ion led o a educ ion o 0.29% on indus y g ow h, while an inc ease in he squa e o he
inancial ins i u ion by a pe cen age poin led o an inc ease in indus y g ow h by 0.003%. This
sugges s ha o inancial ins i u ions o ha e a posi i e impac on indus ial g ow h, i mus ise
abo e a h eshold o 52%. The e idence o he inancial ma ke s was simila ela i e o ha o
inancial ins i u ions. Signi ican ly, inancial ma ke s had a posi i e impac on se ice and ag icul u al
sec o s. An inc ease in inancial ma ke s by 1% led o a 0.44% inc ease in se ice and 0.21% in
ag icul u al g ow h. Abo e a h eshold o 25% a pe cen age inc ease in inancial ma ke s esul ed in
a dec ease o se ice g ow h by 0.009%. The es ima ed h eshold o he ag icul u al sec o is 19%,
abo e which, a pe cen age inc ease in inancial ma ke s led o a all in ag icul u al g ow h by 0.01%.
Consis en wi h he indings on inancial de elopmen , he impac o inancial ma ke s on indus y
Table 5. Financial de elopmen and sec o al g ow h- GMM model
Va iables Se ice Ag icul u e Indus y
Lagged dependen
a iable
0.838*** 0.816*** 0.765***
(0.0736) (0.0934) (0.0682)
In es men −0.0995** −0.0455** 0.119***
(0.0436) (0.0189) (0.0461)
Consump ion 0.108** −0.0650** −0.0416
(0.0502) (0.0325) (0.0450)
T ade-openness −0.0213* −0.0149 0.0400***
(0.0127) (0.0135) (0.0138)
Labou −0.0251 0.00347 0.0477
(0.0299) (0.0221) (0.0299)
FinDI 0.339** 0.189* −0.532***
(0.143) (0.101) (0.126)
FinDI squa e −0.00359* −0.00298* 0.00614***
(0.00206) (0.00158) (0.00177)
Cons an 0.000 0.000 8.546**
(0.000) (0.000) (3.521)
Diagnos ics:
Obse a ions 387 387 387
Numbe o coun ies 43 43 43
Ins umen s 25 27 27
Yea dummy Yes Yes Yes
Income dummy Yes Yes Yes
Hansen chi-squa e
(p- alue)
4.50(0.213) 6.99 (0.222) 8.37 (0.137)
AR(1): Z(p- alue) −3.07(0.002) −3.04(0.002) −2.46(0.014)
AR(2): Z(p- alue) 1.51(0.132) 1.63 (0.102) 1.38 (0.168)
No e: Robus s anda d e o s in pa en heses, *** p < 0.01, ** p < 0.05, and * p < 0.1 e e s o signi ican le els a 1%, 5%
and 10% espec i ely. FinDI is inancial de elopmen index.
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g ow h was nega i e while he squa e was posi i e. Thus, o inancial ma ke s o ha e a posi i e
impac on indus ial g ow h, i s le el mus ise o 29%. The h esholds o he inancial ma ke s a e
lowe ela i e o bo h he o e all inancial de elopmen and inancial ins i u ions, e lec ing he
unde de eloped na u e o inancial ma ke s in he egion.
Table 6. Financial s uc u e and sec o al g ow h- GMM model
Va iables Financial ins i u ions Financial ma ke s
Se ice Ag icul u e Indus y Se ice Ag icul u e Indus y
Lagged
dependen
0.824*** 0.945*** 0.928*** 0.868*** 0.805*** 0.810***
(0.0905) (0.0842) (0.0435) (0.104) (0.0797) (0.0873)
In es men −0.121*** −0.0585** 0.130*** −0.0920* −0.0605** 0.111*
(0.0420) (0.0232) (0.0431) (0.0498) (0.0306) (0.0658)
Consump ion 0.0866* −0.0783** −0.00158 0.135 −0.0519 −0.118*
(0.0522) (0.0374) (0.0360) (0.0936) (0.0369) (0.0624)
T ade-
openness
−0.0229 −0.00800 0.0159* −0.0214 −0.0157* 0.0339***
(0.0151) (0.0103) (0.00916) (0.0170) (0.00955) (0.0126)
Labou −0.0244 −0.0220 0.00505 0.0138 0.00460 −0.0123
(0.0330) (0.0255) (0.0191) (0.0365) (0.0196) (0.0236)
FII 0.278*** 0.498*** −0.293***
(0.0992) (0.177) (0.0858)
FII squa e −0.00207* −0.00636** 0.00281**
(0.00118) (0.00258) (0.00111)
FMI 0.439*** 0.210** −0.316***
(0.146) (0.105) (0.0998)
FMI squa e −0.00897** −0.00555* 0.00554***
(0.00351) (0.00286) (0.00185)
Cons an 0 0 0 0 8.968** 5.158
(0) (0) (0) (0) (4.236) (4.028)
Diagnos ics:
Obse a ions 387 387 387 315 315 315
Numbe o
coun ies
43 43 43 36 36 36
Ins umen s 25 27 29 30 28 27
Yea dummy Yes Yes Yes Yes Yes Yes
Income
dummy
Yes Yes Yes Yes Yes Yes
Hansen chi-
squa e
(p- alue)
5.87(0.118) 8.92(0.112) 11.48(0.119) 8.46(0.390) 8.71(0.190) 6.16(0.291)
AR (1): Z
(p- alue)
−3.11(0.002) −3.05(0.002) −2.53(0.012) −2.63(0.009) −3.13(0.002) −2.29(0.022)
AR (2): Z
(p- alue)
1.53(0.126) 1.49(0.137) 1.41(0.159) 1.41(0.158) 1.78(0.076) 1.24(0.216)
No e: Robus s anda d e o s in pa en heses, *** p < 0.01, ** p < 0.05, and * p < 0.1 e e s o signi ican le els a 1%, 5%
and 10% espec i ely. FII is he inancial ins i u ion index and FMI is he inancial ma ke s index.
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4.4. Robus ness check
To u he alida e he consis ency o he indings o his s udy, he same models we e es ima ed
using he seemingly un ela ed eg ession (SUR). The SUR can accoun o in e sec o al linkages (A e y,
1977) whe e sec o al g ow h (dependen a iables) in se ice, indus y and ag icul u e a e ea ed as
endogenous a iables and a e simul aneously es ima ed. Thus, equa ions 6, 7 and 8 we e simul a-
neously es ima ed. The esul s ela ing o he impac o inancial de elopmen on sec o al g ow h a e
shown in Table 7. Indeed, he e idence showed ha inancial de elopmen had a posi i e impac on
se ice and ag icul u al g ow h, while he impac was nega i e o indus ial g ow h. The squa e o
inancial de elopmen , howe e , was posi i ely ela ed o indus ial g ow h, while a nega i e ela ion
was ound in he case o he se ice and ag icul u al sec o s. This is consis en wi h he esul s o he
main GMM model.
The indings ela ing o he impac o inancial s uc u e on sec o al g ow h is displayed in Table
8. The e idence o he inancial ins i u ions pa ly co obo a ed he main esul s whe e he
inancial ins i u ion was ound o ha e a signi ican posi i e impac on se ice g ow h and a
signi ican nega i e impac on indus ial g ow h. Financial ma ke s we e shown o ha e a sig-
ni ican posi i e e ec on he ag icul u al sec o , while he ela ionship was signi ican ly nega i e
wi h he indus ial sec o . The squa e o inancial ma ke s poin ed o a h eshold e ec ac oss he
h ee sec o s. This is also in line wi h he esul s in he main GMM model hough he sign o he
se ice sec o in he SUR model is posi i e. Thus, he impac o inancial s uc u e a ies ac oss
di e en sec o s.
Table 8. Financial s uc u e and sec o al g ow h- SUR model
Va iables Financial ins i u ions Financial ma ke s
Se ice Ag icul u e Indus y Se ice Ag icul u e Indus y
In es men 0.00472 −0.165*** 0.160*** −0.0518 −0.119* 0.171***
(0.0480) (0.0545) (0.0485) (0.0585) (0.0616) (0.0588)
Consump ion 0.288*** −0.363*** 0.0740 0.428*** −0.213** −0.215**
(0.0727) (0.0825) (0.0734) (0.0997) (0.105) (0.100)
T ade-
openness
−0.0760*** −0.0349* 0.111*** −0.0540** −0.0653*** 0.119***
(0.0177) (0.0201) (0.0178) (0.0228) (0.0240) (0.0229)
Labou −0.255*** 0.110** 0.145*** −0.0554 0.0544 0.00114
(0.0435) (0.0494) (0.0440) (0.0577) (0.0609) (0.0580)
FII 0.625*** −0.138 −0.485*** −0.0980 1.069*** −0.972***
(0.150) (0.170) (0.151) (0.177) (0.186) (0.178)
FII squa e −0.00105 0.00173 −0.000692 0.0106** −0.0255*** 0.0149***
(0.00207) (0.00235) (0.00209) (0.00445) (0.00469) (0.00447)
Cons an 53.30*** 39.74*** 6.939* 45.75*** 39.21*** 15.03***
(3.662) (4.158) (3.699) (4.552) (4.799) (4.576)
Diagnos ics:
Obse a ions 426 426 426 349 349 349
R-squa ed 0.372 0.583 0.553 0.260 0.615 0.499
Yea dummy Yes Yes Yes Yes Yes Yes
Income
dummy
Yes Yes Yes Yes Yes Yes
No e: Robus s anda d e o s in pa en heses, *** p < 0.01, ** p < 0.05, and * p < 0.1 e e s o signi ican le els a 1%, 5%
and 10% espec i ely. FII is inancial ins i u ion index and FMI is inancial ma ke s index.
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5. Conclusion and policy implica ions
The ole o inancial de elopmen in economic g ow h has been ex ensi ely examined. By disag-
g ega ing alue addi ion in o ag icul u e, se ice, and indus y, he s udy examines whe he he
impac o inancial de elopmen a ies ac oss sec o s o he economy. Using he Gene alised
Me hod o Momen s and co e ing 44 sub-Saha an A ican coun ies o e he pe iod 1990–2018,
he esul s e ealed ha inancial sec o de elopmen could spu he g ow h o se ice and
ag icul u al sec o s bu only up o a h eshold o 47.2% and 31.7% espec i ely, beyond hese
poin s inancial de elopmen could se e as a d ag on he g ow h o hese sec o s. The indings
showed ha inancial de elopmen could posi i ely a ec indus ial g ow h only a e a aining
a h eshold o 43.3%. Thus, he s udy inds suppo o he oo much inance hypo hesis in he case
o se ice and ag icul u al sec o s while oo li le inance was es ablished wi h espec o he
indus ial sec o . The esul is obus e en a e accoun ing o in e sec o al linkages using he
Seemingly Un ela ed Reg ession model. Ano he key inding is ha inancial s uc u e ma e s in
explaining sec o al alue addi ion as he impac o inancial ins i u ions and ma ke s a y ac oss
sec o s. The indings ha e some implica ions o policymake s in sub-Saha an A ica and de elop-
ing coun ies wi h simila ea u es. Policymake s should conside he op imal le el o inancial
de elopmen when o mula ing sec o al g ow h policies. To maximise he bene i s associa ed wi h
indus ialisa ion, he e is a need o p omo e de elopmen o he inancial sec o as he esul s
showed ha inancial de elopmen could a ec indus ial g ow h only a a highe h eshold. The
analysis u he e ealed ha inancial s uc u e ma e , hence he e is he need o policies o
de elop bo h inancial ins i u ions and inancial ma ke s. Using inancial de elopmen da a on
a sec o al basis could ha e added o he no el y o his s udy and policy ecommenda ion;
howe e , he s udy was limi ed by he lack o longi udinal da a on his a iable. Fu u e s udies
ha employ longe ime se ies da a on sec o al inancial de elopmen indica o s a e needed o
add u he insigh s o he inance–g ow h li e a u e.
Table 7. Financial de elopmen and sec o al g ow h- SUR model
Va iables Se ice Ag icul u e Indus y
In es men 0.0294 −0.174*** 0.144***
(0.0495) (0.0542) (0.0481)
Consump ion 0.409*** −0.390*** −0.0191
(0.0726) (0.0795) (0.0705)
T ade-openness −0.0769*** −0.0438** 0.121***
(0.0184) (0.0202) (0.0179)
Labou −0.246*** 0.0850* 0.162***
(0.0448) (0.0491) (0.0435)
FinDI 0.739*** 0.409** −1.148***
(0.179) (0.196) (0.174)
FinDI squa e −0.00273 −0.00666* 0.00937***
(0.00313) (0.00343) (0.00304)
Cons an 54.02*** 37.61*** 8.358**
(3.665) (4.017) (3.561)
Diagnos ics:
Obse a ions 426 426 426
R-squa ed 0.332 0.586 0.560
Yea dummy Yes Yes Yes
Income dummy Yes Yes Yes
No e: Robus s anda d e o s in pa en heses, *** p < 0.01, ** p < 0.05, and * p < 0.1 e e s o signi ican le els a 1%, 5%
and 10% espec i ely. FinDI is inancial de elopmen index.
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Funding
The au ho s ecei ed no di ec unding o his esea ch.
Au ho de ails
Yazidu Us a z
1
E-mail: [email p o ec ed]
ORCID ID: h p://o cid.o g/0000-0003-4356-7608
Ashena i Beyene Fan a
1
1
Uni e si y o S ellenbosch Business School, Sou h A ica.
Ci a ion in o ma ion
Ci e his a icle as: Financial de elopmen and economic
g ow h in sub-Saha an A ica: A sec o al pe spec i e,
Yazidu Us a z & Ashena i Beyene Fan a, Cogen Economics
& Finance (2021), 9: 1934976.
No es
1. The sec o al classi ica ion o alue addi ion ollows he
In e na ional S anda d Indus ial Classi ica ion (ISIC).
Ag icul u e co e s o es y, ishing, hun ing, cul i a ion
o c ops, and li es ock p oduc ion. Se ices include
wholesale and e ail ade (including ho els and es-
au an s), anspo , and go e nmen , inancial, p o-
essional, and pe sonal se ices such as educa ion,
heal hca e, and eal es a e se ices. The indus ial
sec o comp ises alue added in mining, manu ac u -
ing (also epo ed as a sepa a e subg oup), cons uc-
ion, elec ici y, wa e , and gas.
2. FII: Access: Comme cial bank b anches pe 100,000
adul s, and ATMs pe 100,000 adul s. Dep h: P i a e
sec o c edi o GDP, pension und asse s o GDP,
mu ual und asse s o GDP, and li e and non-li e
insu ance p emiums o GDP. E iciency: Ne in e es
ma gin, lending-deposi sp ead, non-in e es income
o o al income, o e head cos s o o al asse s, e u n
on asse s and e u n on equi y. FMI: Access: Pe cen o
s ock ma ke capi alisa ion ou side he op 10 la ges
companies, he o al numbe o deb secu i y issue s.
Dep h: In pe cen o GDP: S ock ma ke capi alisa ion,
s ock ma ke u no e , in e na ional go e nmen deb
secu i ies ou s anding, and o al deb secu i ies ou -
s anding o p i a e non- inancial co po a ions.
E iciency: S ock ma ke u no e a io (adop ed om
S i ydzenka, 2016).
3. The h eshold alues a e calcula ed as: Co icien o
inancial de elopmen /-2(Co icien o squa e o
inancial de elopmen ).
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