FINANCIAL SECTOR REFORM AND ECONOMIC PERFORMANCE IN SUB-SAHARAN AFRICA
Date
2015-11-06
Authors
OGBEIDE, FRANK IYEKORETIN
Journal Title
Journal ISSN
Volume Title
Publisher
University of Benin
Abstract
Financial sector reform was part of the structural adjustment programme (SAP)
adopted in the early 1980s by countries in sub-Saharan Africa (SSA) with the aim of
promoting financial development and macroeconomic performance. Despite this,
financial systems have only responded marginally in SSA, raising concerns on the
significance of financial reforms in improving financial development, and its
transmission effect on economic performance. Besides, empirical evidence explaining
the effects of financial reforms on financial development and economic performance
appear mixed. Thus, this study investigates the impact of financial reform on financial
development, using both traditional panel and the generalised method of moments
(GMM) estimator. Further, the study examines the effect of financial reform on
economic performance, and lastly, test for causality among financial reform, financial
development and economic performance using Multivariate Vector Autoregressive
(MVAR) model. The data for the study were sourced from the 2013 World Bank’s
World Development Indicators (WDI) and International Monetary Fund (IMF) for a
sample of 14 SSA countries for the period 1980 to 2012.
The findings from the study indicate that policies of financial reform (especially the
reform of domestic banking sector) have led to financial development in the overall
SSA countries. Furthermore, results show that financial reform positively and
significantly support growth in real output, domestic investment, human development,
but, however, reduces the occurrence of macroeconomic instability in the region.
These results were significantly different using income and stock market effects,
confirming their importance in explaining the effectiveness of financial reform on
financial development and economic performance in the continent. Specifically,
financial reform has a negative, but significant effect on financial development in low
income economies, whereas the impact was positive and significant in countries
classified as lower-middle-income and upper-middle-income economies. Financial
reform significantly promote growth in real per capita GDP in both low-income and
lower-middle-income economies (same with results obtained for the overall sample)
but adversely affect per capita income growth in upper-middle-income countries.
Results also show that financial reform has a positive effect on human development,
irrespective of income classification of sampled countries. However, financial reform
generates economic instability in both lower-middle-income and upper-middle income countries, but was found to restrain the occurrence of macroeconomic
uncertainties in low-income economies. The results show that the presence of
domestic stock market (even in country-specific analysis using data from Nigeria and
South Africa) improves the positive transmission effect of financial reform across all
performance metrics, but raises the possibility of occurrence of macroeconomic
instability in the region. From the causality test analysis, financial reform causes
financial development in about 36% of the entire sample countries, while reverse
causality holds in 14% of the countries, and another 14% showing evidence of feedback effects between financial reform and financial development. In addition, about
36% of the countries studied show that financial reform causes growth in per capita
income, 7.0% revealed that per capita income growth intensifies the need for financial
reforms, while 57.0% showed no clear flow of causality. Also, the causality test result
shows financial reform lead to human development in over a third of countries
covered, while no causation was observed in 57% of the entire sample. Lastly, 21.3%
of countries showed that financial liberalisation lead directly to macroeconomic
instability, 14.3% shows reversed causality, whereas the remaining 64.3% of sampled
countries did not indicate any form of causality.
This study recommends that policy makers in SSA should simultaneously consider
the financial and real sectors as interdependent. Governments of countries in SSA
should make a conscious effort to reduce or eliminate the negative effects of inflation
and natural resource dependence on domestic financial development, and other
economic performance fundamentals. Improving access to more diversified financial
services/products induced by policies of financial reform would support inclusive
growth that reduces poverty and boost human development. Lastly, monetary
authorities in the region should promote a prudential framework in line with the
unique economic structures of their economy and ensure that policies of financial
liberalisation are cautiously implemented in a stable economy with appropriate
institutional framework to avoid undesirable outcome.