Financial development, institutional quality and economic growth in countries in sub-Saharan Africa (SSA)

Abstract

The main objective of this study was to assess the relationship between financial development, institutional quality, and economic growth. The research questions were centred on whether the huge variations in the growth performances of the economies in SSA could be attributable to differences in institutional quality and financial development levels in these countries. Thus, the study contributes to literature by examining the impact of institutional quality and financial development on economic growth in low- and middle-income countries. Data was obtained from the World Bank and covered the period from 1975 to 2020 for 13 low and 18 middle income SSA countries. The study employed an ARDL model to establish both short and long run dynamics in the two sub samples. The study confirmed both short and long run causality from financial and institutional quality to growth. Institutional quality enhances growth in both low- and middle-income countries in the long run. Whilst the direction of the impact is the same, the magnitude of the impact of institutional quality is different within the two categories. Institutional quality plays a more significant role in low-income countries compared to middle income economies. The study brings out potential financial fragility and systemic risks in financial institutions among countries in SSA. Policies that enhance the quality, consistency, and uniformity of legal reasoning in judicial decisions are ideal. Reducing the risk profile for investments may enhance the flow of credit to the private sector by financial institutions.