FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: A CAUSAL ANALYSIS
Abstract
This study sought to analyze the nature of the causal relationship that prevails in the two largest economies in Sub-Saharan Africa- Nigeria and South Africa between 1996 and 2020. The study follows the recommendations of the World Bank Global Financial Development index, to measure financial development from its four dimensions, by institutions and markets. These include depth (money supply and stock market capitalization), access (bank branches and value of stocks outside top ten), efficiency (interest rate spread and stock turnover), and stability (capital to asset ratio and stock price volatility). These served as the explanatory variables. The explained variable is gross domestic product growth rate as a measure of economic growth. The Granger causality test is employed for analysis. The results reveal that only in South Africa did a unidirectional causal relationship exist, flowing from economic growth to financial stability (stock price volatility). In the case of Nigeria, no causal relationship was found. The study concluded that demand-following financial development was what prevailed in South Africa, while the Independent stage hypothesis holds in Nigeria. The study recommended that more financial instruments and products such as mobile banking schemes be created and made available to help mop more cash in circulation into the formal financial system. Also, growth board schemes initiated to encourage the listing of companies with high growth potential on the exchange must be enhanced.
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