Financial Integration and Financial Development: Evidence from Sub-Saharan African (SSA) Countries.

Abstract

The study examined the effects of financial integration on financial development for 49 Sub-Saharan Africa (SSA) countries for the period 2002 to 2021. Five independent metrics of financial development and two financial integration measures were utilized to ensure robustness of the anticipated results. Using a dynamic panel GMM-SYS estimation technique, it was discovered that the impacts of financial integration on financial development in SSA are highly dependent on the proxies employed to capture these two variables of financial integration. Financial integration has a beneficial influence on private sector credit, domestic credit, liquid liabilities, and finance size, when proxied by the interest rate spread. However, this measure of financial integration limits the volume of financial activity of financial intermediaries as it’s negatively correlated. Similarly, when measured using gross private capital flows, financial integration has statistically positive effects on financial development as measured by liquid liabilities but has a negative impact on financial development as measured by finance activity and financial size in Sub-Saharan African nations. The general implication of these findings is that the influence of financial integration on financial development in SSA is complex. However, before reaching a firm conclusion about the relationship between these two variables, several transmission mechanisms by which former influences the latter, as well as their various proxies, must be considered.