Financial Economics

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    THREE ESSAYS ON THE EFFECTS OF CAPITAL FLOWS ON ECONOMIC CYCLES IN THE CEMAC ZONE
    (African Economic Research Consortium, 2024-04-10) Herve, Nenghem Takam
    The objective of this thesis is to analyze the effects of capital flows on the economic cycles of the countries of the CEMAC zone. We opted for our thesis for an econometric approach based on panel data made up of all CEMAC countries. Our study period extends from 1985 to 2019. In the first chapter, we analyze the effect of remittances on fluctuations in economic activity in CEMAC countries. The methodological approach used is the PVAR. The results of this first chapter show that remittances directly influence fluctuations in the economic activity of CEMAC countries, on the one hand. And on the other hand, remittances play a stabilizing role insofar as they are counter-cyclical in nature with fluctuations in production per capita; which suggests, according to the literature, an altruistic motivation. The study also indicates that remittances, although interacting with other variables, can play a key role in mitigating the effects of negative shocks on production. Moreover, the relationship is unidirectional from remittances to fluctuations in economic activity. In the second chapter, we examine the effects of official development assistance on the economic cycles of CEMAC countries. This objective was achieved by using the ARDL method to capture the relationship between APD and cycle in the long term. The results reveal that in the short term, official development assistance, in addition to being negative, has no significant effects on the output gap of CEMAC countries. On the other hand, ODA, in addition to having a positive and statistically significant long-term influence on the output gap, is procyclical. This significance of ODA on the output gap is not negligible. Finally in the third chapter, we identify the link between FDI and the synchronization of economic cycles in the CEMAC zone. The methodology used to achieve this objective is based on Park’s Generalized Feasible Least Squares (1967). The results show, on the one hand, that FDI has a positive effect on the synchronization of the economic cycles of the countries of the CEMAC zone; and on the other hand that the exuberance of economic cycles through short-term flows, international value chains resulting from foreign direct investment and specialization induced by risk sharing are the channels through which direct investment foreigners affect the synchronization of the economic cycles of the CEMAC countries. Keywords: Remittances, official development assistance, foreign direct investment, economic cycles, CEMAC.
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    ESSAYS ON DIGITAL FINANCE, FINANCIAL INCLUSION AND POVERTY ALLEVIATION IN WAEMU
    (Université Félix Houphouët, 2021-06-03) SENOU, Melain Modeste
    Financial Inclusion is not an objective per se, but only to the extent that it helps alleviate poverty. This thesis aims then at investigating the mechanisms through which digital finance may solve the multiple financial market imperfections by improving financial Inclusion and alleviate poverty in developing countries. We estimated first a random effect model and a system GMM and found that beyond the specific effects of mobile phone penetration and Internet usage, the joint use of these two technologies is very key to financial inclusion in the WAEMU countries. Secondly, we made a cluster analysis and a logistic regression to investigate respectively the macroeconomic and microeconomic driving factors of mobile money adoption. We found that illiteracy, underemployment as well as the lack of mobile infrastructure are the main macroeconomics bottlenecks for digital finance adoption. In addition, the age, gender, education level, poverty status as well as the ownership of bank account are the main microeconomics driving factors of digital finance adoption in WAEMU. Finally, we estimated the probability of lifting out of poverty in WAEMU with a recursive bivariate probit model and concluded that both mobile led financial inclusion and bank led financial inclusion are essential for sustainable poverty alleviation in WAEMU. The findings from these essays suggest to governments to support both Mobile Network Operators (MNOs) and Financial Institutions to deliver financial services through digital technologies to last miles. This requires then a flexible regulation toward the digital finance business in WAEMU.
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    FINANCIAL SECTOR REFORM AND ECONOMIC PERFORMANCE IN SUB-SAHARAN AFRICA
    (University of Benin, 2015-11-06) OGBEIDE, FRANK IYEKORETIN
    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.
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    Loan Growth and Risk: Evidence from Microfinance Institutions in Africa
    (University of Cape Town, 2019-01-06) Moyi, Eliud Dismas
    Microfinance markets in Sub-Saharan Africa (SSA) have experienced remarkable growth, particularly after the early 2000s. Since microfinance institutions (MFIs) provide financial services such as loans, savings and insurance to poor clients who face exclusion from formal financial institutions, they are considered as one of the most prolific tools to alleviate poverty and achieve financial inclusion in developing countries. These institutions are of particular importance in SSA, given that the region has the highest poverty levels in the world and the highest levels of financial exclusion. However, in recent years the fast loan growth of MFIs has been accompanied increasingly by loan delinquencies which threaten the financial health of these institutions. This is a major concern for policymakers, regulators and practitioners given the developmental importance of microfinance in the region. Despite the pivotal role of microfinance, there is only a very limited number of studies that either investigate the underlying reasons for the fast growth of MFIs or that identify the determinants of credit risk in MFIs in this particular region of Africa. Motivated by both the remarkable loan growth and the rising credit risk that MFIs experienced and the fact that SSA has been neglected in the relevant literature, this thesis provides evidence from the region on the factors that contribute to MFIs’ growth, the determinants of MFIs’ credit risk as well as the factors that influence access to MFIs credit. The latter pays particular attention to the effect of mobile financial services (MFS) on borrowing from MFIs, an aspect that has been ignored in previous scholarly work. Furthermore, the thesis overcomes the limitations of previous studies that employed static regressions, which are limited in dealing with panel endogeneity bias, by focusing on the dynamic aspects of loan growth and credit risk. The thesis is structured around three related studies that are presented in three chapters, namely Chapter 2, Chapter 3 and Chapter 4. The purpose of the second chapter is to identify the factors that explain variations in loan growth in the region’s MFIs. This is an important issue as high loan growth may pose significant stability risks in the microfinance sector via a deterioration in portfolio quality. The chapter applies two-step system generalised method of moments estimators on data for 34 countries in SSA over the period 2004 - 2014. The results show that loan growth is higher in MFIs that have lower risk exposure, higher capital asset ratios and already recording high growth. Similarly, loan growth is higher in countries with better economic prospects, and in those with sound private sector policies and regulations. Against expectations, loan growth is faster in countries with poor legal rights of borrowers and lenders. Credit risk in microfinance institutions in SSA has been rising, and the financial health of these institutions remains an issue of concern. Hence, Chapter 3 examines the factors that explain variations in credit risk in MFIs in the region. Similarly, the chapter employs a system GMM approach on data for 34 countries in SSA over the period 2004 – 2014. Results suggest that the main predictors of credit risk in SSA are lagged credit risk, loan growth, provisions for loan impairment, GDP per capita growth and ease of getting credit. In addition, the study identifies threshold effects in the relationship between credit risk and loan growth. Credit risk falls with loan growth until a trough at 36.8% when this relationship is reversed. On the regional scale, comparisons suggest that credit risk is most persistent in East Asia and the Pacific but least persistent in SSA. Relatively few scholarly works have analysed the influence of mobile financial services (MFS) on access to credit. Chapter 4 aims to identify the factors that explain the differences in the propensity to use loans from MFIs in Kenya, paying particular attention to the effects of mobile money (M-money), mobile banking (M-banking) and mobile credit (M-credit). Kenya is an interesting case study because the country outperforms other SSA countries in terms of financial and digital inclusion. The study applies a probit model using FinAccess cross sectional data that was collected in 2013 (N=6112) and 2015 (N=8665). After addressing endogeneity concerns in the data, the 2013 results suggest that the factors that make a significant difference in the likelihood of using MFI credit include income, gender and type of cluster. An important observation is that non-poor users of M-money are more likely to use microcredit. The 2015 results show that the likelihood of using MFI credit is lower among those using M-banking and M-credit as well as among males and married persons. However, higher income, being educated, higher household size and being located in a rural cluster are associated with a higher propensity to use MFI credit. In addition, the results suggest a Ushaped relationship between age and the probability to use MFI credit. Similarly, the negative relationship between the likelihood of using MFI credit and using M-banking and M-credit suggests that the introduction of MFS in the financial sector has resulted in the migration of clients from microfinance products towards mobile-based financial services. In terms of policy, two recommendations stand out. Firstly, since dynamics matter for both loan growth and credit risk, credit management strategies that incorporate past risk and loan performance are likely to be more effective. Secondly, the evident trade-offs between loan growth and credit risk confirm the fact that modest loan growth is not the source of instability within the region’s microfinance sector. However, the presence of threshold effects suggests that MFIs should determine the turning points for lending growth because excessive growth in loans can be perilous to the existence of the institution itself, and the sector by extension.
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    FISCAL ADJUSTMENT, ECONOMIC GROWTH AND INFLATION IN TANZANIA (1967-2011)
    (University of Dar es Salaam, 2015-10-22) Mtui, John Michael
    The study analyses the effect of fiscal adjustment in promoting economic growth and the fight against inflation in Tanzania from 1967 to 2011. The study is underpinned by both descriptive and econometric analyses based on a dynamic autoregressive distributed lag error correction model. The study findings confirm that: public investment spending, public consumption spending, real exchange rate depreciation, private investments are growth enhancing. Economic and fiscal reforms of the mid 1980s and 1990s, respectively, augment economic growth in the long-run. Only lagged GDP, public consumption spending, real exchange rate and trade openness have significant effects on economic growth in the short-run. The long-run estimates of the inflation model indicate real GDP growth and nominal exchange rate have impact on inflation. Budget deficit is significant but seem to have a negative effect on price development. Thus, abstinence from cutting public investment spending and curtailing non-productive expenditures should be observed. Such measures as the adoption of Medium Term Expenditure Framework (MTEF) as a planning and strategy for reducing wasteful expenditure and the expenditure reprioritization and efficiency instituted through NSGRP should be sustained. Attainment of price stability in Tanzania hinges on stable economic growth and exchange rate. This requires a credible and sustained fiscal policy, supported by an appropriate exchange rate and monetary policies. Rationalization of public spending and expenditure efficiency are critical. To sustain GDP growth and thus price stability, there is a need to improve productivity.