Financial deepening and economic growth: A System GMM Panel Analysis with application to 7 SSA countries

The relationship between financial development and economic growth has been a key study in economics field for a long time. This paper examines the link between financial development and economic growth in 7 Sub-Saharan African countries - Nigeria, South Africa, Lesotho, Malawi, Sierra Leone, Botswana and Kenya, over the period of 1981-2013. The study applied both static and dynamic panel data approach, to investigate the relation between financial development and economic growth. The results show that financial development has not led to economic growth in the panel of the selected countries when domestic credit provided by the banking sector is used as a proxy for financial development. The results thus lend support for the independent hypothesis postulates that financial development and economic growth are causally independent. Our study also considered foreign direct investment and interest rate as determinant of growth, but only interest rate suggested positive effect on economic growth. The implication of the results is that there is ardent need to develop the financial sector in order to stimulate real growth in the economies of these countries. Development of microfinance institutions as a complement to the conventional commercial banks will play a great role mobilising savings and providing ease access to fund, thus engendering growth process in the Sub-Saharan Africa.