FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: A COMPARATIVE ANALYSIS OF NIGERIA AND SOUTH AFRICA
Abstract
Advances in the financial system have been acclaimed to improve economic growth, drawing from theories of the latter. This study set out to test this hypothesis with respect to financial institutions and markets in the two largest economies of Sub-Saharan Africa. Economic growth for both countries is measured by gross domestic product annual growth, as the explained variable. Financial development is measured by institutions and markets. The dependent variable by financial institutions includes money supply, bank branches, interest rate spread, and bank capital to asset ratio. For financial markets, market capitalization, traded value excluding top 10 traded companies to total traded value, market turnover, and stock price volatility. Data is obtained from the World Bank for both countries. Two models are developed, one for each country. For analysis, the Augmented Dickey-Fuller unit root test, and autoregressive distributive lag are employed. The results indicated that of all variables considered only money supply (financial depth by the institution) had a significant, yet negative influence on economic growth in Nigeria. No dimension of financial development is related to output in the long term for South Africa. The study inferred that financial development in both countries is yet to advance sufficiently to make desired effect on economic growth. Expansion of financial institution market and institutions in the form of exchange growth scheme (for small and medium businesses) and rural bank branching was recommended by the study.
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