Does Openness Matter for Financial Development in Africa?

Abstract

This paper analyzes the links between financial and trade openness and financial development in Sub-Saharan African (SSA) countries. It is based on a panel dataset using methods that tackle slope heterogeneity, cross-sectional dependence and non-stationarity, important econometric problems that are often ignored in the literature. The results do not point to a general direct robust link between trade and capital account openness and financial development in SSA, once we control for other factors such as GDP per capita and inflation. But there is some indication that trade openness is more important for financial development in countries with better institutional quality. The findings might be due to a number of factors including distortions in domestic financial markets, relatively weak institutions and/or poor financial sector supervision. Thus, African policy makers should be cautious about expectations regarding immediate gains for financial development from greater international integration. Such gains are more likely to occur through indirect channels. JEL Classification Numbers: F36, F43, O16

Do Financial and Trade Openness Lead to Financial Sector Development in Nigeria?

“…This fi nding is supportive of Baltagi et al (2009) and David et al (2014) as they found the same for private credit. Our discovery that fi nancial development in fi nancial markets decreases as economic prosperity increases, according to Baltagi et al (2007), is not out of order.…”

“…However, they contradict Hauner and Prati (2008), Pham (2010) and David et al (2014) who found that trade openness is more important for fi nancial development than fi nancial openness and Baltagi et al's (2009) suggestion that opening either trade or capital may benefi t financial development.…”

“…He discovered that the more open an economy is, the higher the economy's fi nancial sector may suffer from global fi nancial crisis. In the case of sub-Saharan African (SSA) countries, David et al (2014) found that trade openness is more important to obtain a higher fi nancial development than fi nancial openness. Unlike the reviewed studies, we conduct a time series study and not a panel study and we contribute to the literature by applying fi nancial development indicators that measure access to fi nance in fi nancial institutions and markets (see ; Table 1) and not just the popularly used measures of fi nancial depth.…”

Openness and Financial Development in Central and Eastern European Countries

“…On the other side trade openness contributes to the development of financial sector by increasing the necessity of insurance and risk diversification through financial institution due to increasing uncertainty, income volatility, foreign competition and higher exposure to external shocks (Newbery and Stiglitz, 1984;Svaleryd and Vlachos, 2002). Furthermore, Do and Levchenko (2004) suggested that increasing trade openness affects financial development positively or negatively through external finance demand depending on the income levels of the countries. In this context, financial sectors of the countries with relatively higher income are affected positively from increasing trade openness, while financial sectors of the countries with relatively lower income are influenced negatively from the increasing trade openness.…”

“…However some papers have revealed that there is no significant interaction amid financial/trade openness and development of financial sector (e.g. see David et al (2014), Muhammad et al (2016)). Law (2007Law ( , 2009 analyzed the interplay between openness and financial sector development and tested the validity of SOH for different groups of developing countries employing panel regression and revealed that openness affected financial development positively and SOH is valid.…”