Financial Development and Economic Growth Nexus: A Study of The Role of Stock Markets and Banking Industry in Selected African Countries

In this study, we investigate the impact of financial development on economic growth in 11 selected African countries over the period 1990 through 2009, with special emphasis on the contribution of stock market development. Besides, the study examines the relative importance of stock market and banking sector on economic growth; and the existence of supply leading hypothesis in the selected countries. In achieving these objectives, the study includes numerous control variables such as initial income, population growth rate, human capital, government expenditure, money supply, foreign direct investment, interest rates and inflation rate. The methodology is basically divided into two with GMM system approach and panel cointegration techniques utilized on panel data, while ARDL is employed in the time series analysis. The sample includes South Africa, Egypt, Nigeria, Morocco, Kenya, Botswana, Cote D’Ivoire, Tunisia, Ghana, Mauritius and Swaziland. The panel and time series results indicate that stock market, in terms of liquidity, is positively associated with economic growth (except in Morocco, Tunisia, Nigeria and Cote D’Ivoire). The findings further suggest that stock markets perform better than banking sector in most of the countries (with the exception of Botswana, Ghana and Nigeria). There is also evidence for supply leading hypothesis (with the exception of Cote D’Ivoire, Tunisia, Swaziland and Ghana). Generally, the implication is that financial development should be given priority with special emphasis on liquidity of stock markets in Africa. The study has numerous contributions. For instance, to our knowledge, this is first study to simultaneously consider the impact of stock markets and banks on economic growth in African countries.