FINANCIAL DEVELOPMENT, INSTITUTIONAL QUALITY, AND ECONOMIC GROWTH IN SUB-SAHARAN AFRICAC

The paper analyzes the dynamic relationships among financial development, institutional quality and economic growth of 35 Sub-Saharan African (SSA) countries during the year 2008-2023. Despite the extensive literature that has discussed the finance-growth nexus, its application in the context of heterogeneous institutions is debatable, especially in emerging and structurally limited economies like SSA. This article goes beyond the traditional linear finance-growth argument by including institutional variables and effects of interaction to indicate whether financial development on its own stimulates growth or it is effective based on the quality of governance. The panel data methods, namely, the Fixed Effects and the Random Effects models, are used to assess the direct and moderating impacts of the major financial variables, such as domestic credit to the private sector and bank liquidity reserves, and the institutional factors, such as the rule of law and control of corruption, on the growth in the GDP per capita. The empirical evidence demonstrates that there is a multidimensional and complicated relationship. However, unlike the conventional belief, domestic credit to the non-government sector and bank liquidity resource portrays strong negative correlations to economic growth. This implies that financial deepening is not necessarily associated with productive investment in SSA, which may be because of ineffective intermediation, inefficient distribution of credit, structural inflexibilities, or governance failures in financial systems. Banks holding excessive liquidity can also reduce the ability of banks to transmit credit to productive sectors, which will reduce the growth outcomes. The negative relationship between inflation and growth is also worthy of reinforcing the fact that macroeconomic stability is supporting capital accumulation and investment planning. Institutional quality instead, especially the rule of law, is found as a very powerful and statistically significant positive determinant of economic growth. The present observation highlights to the protection of good law systems, enforcement of contracts and protection of property rights as being of paramount importance to investor confidence and lowering the transaction costs. Although control of corruption fails to show a direct effect of growth, its relationship with domestic credit is positive and significant. This relationship establishes the existence of institutional moderation, which means that only in case of better governance, the growth enhancing potential of financial development is realized. In particular, the complementarity between financial and institutional reforms is seen in that in cases where there is enough control over corruption, private sector credit is a positive contributing factor to growth. These results contradict the belief that financial liberalization is only enough to cause sustainable economic growth in SSA. Rather, as the findings indicate the two factors, financial development and institutional quality are mutually reinforcing elements of a wider development model. Expansive credit policies that do not enhance the legal and regulatory institutions stand a chance of inefficiency and poor growth results. The research conclusively points out that institutional capacity building, especially reinforcement of the rule of law and curbing corruption is not just complementary, but a precondition of financial development to result in growing development dividends that are meaningful and sustainable in Sub-Saharan Africa.