Financial intermediation and economic growth: evidence from Western Africa

Abstract

The relationship between finance and economic growth has received considerable attention in economic development literature during recent decades. However, little interest has been devoted to African countries, and specifically, to West African countries. This paper tries to fill that gap, by using causality tests to empirically examine the relationship between finance and economic growth, in the context of West African country members of the Economic Community of West African States (ECOWAS). In all but a few countries, results indicate a weak causal relationship between finance and economic development on one side, and between economic development and finance on the other side. These results imply, ceteris paribus, that leaders of West African countries should focus their economic and monetary policies on the development of financial intermediation, which in turn will favour economic growth.

The Nexus between Financial Development and Economic Growth in Lao PDR

“…Empirical studies which support the 'supply-leading' hypothesis-that is, the unidirectional causation that runs from financial growth to economic growth-are found in, for example, McKinnon, 1973;King and Levine, 1993;Neusser and Kugler, 1998;Levine et al 2000;Majid and Mahrizal, 2007;Odhiambo, 2007;Quartey and Prah, 2008;Baliamoune-Lutz, 2008;Gries et al 2009;Ang, 2009;Jalil and Feridun, 2010;Gries et al 2011;Shahbaz, 2013, Uddin et al 2013 On the other hand, the 'demand-following' hypothesis-that is, the unidirectional causation running from economic growth in financial development-has been supported by Gurley and Shaw, 1967;Goldsmith, 1969;Atindehou et al 2005;Ghirmay, 2004;Levine, 2005;Odhiambo, 2007;Majid and Mahrizal, 2007;Odhiambo, 2007;Ang, 2008;Demirgüç-Kunt andLevine, 2008 andQuartey andPrah, 2008;Odhiambo, 2008;Handa and Khan, 2008;Gries et al 2009;Odhiambo, 2009;Odhiambo, 2010;Gries et al 2011;Rafindadi and Yusof, 2013. In contrast to the above, several other studies have documented the bidirectional relationship between financial development and economic growth (Greenwood and Smith, 1997;Blackburn and Hung, 1998;Blackburn et al 2005;…”

The causal nexus between financial development and economic growth in Kenya

“…Based on the Granger causality test, one cannot ascertain a certain way of causality, since the connection type of the variables turns out to be a mixed bag. Atindehou et al (2005) used three different indicators of financial development related to West African countries and found fragile causal relationship between financial development and economic growth. Interestingly enough, for the three SSA countries, Odhiambo (2007) found conflicting outcome.…”

An Assessment of the Effect of Financial Sector Development on Growth and Unemployment in Nigeria: 1986-2012

“…Thus this can contribute to technological innovations and lead to improvement in the real sector. Moreover, according to the supply leading hypothesis, financial sector development leads to transfer of resources from the traditional sector to the modern sector and promotes and stimulates an entrepreneurial response in these modern sectors (Roger et al 2005) [10]. Thus this approach represents the initial stage of economic development as it supplies the major channel through which economic activities take place.…”

“…According to this school of thought, it is believed that real sector growth and stability lead to increase in the demand for financial services which in turn encourages the creation of financial intermediaries and financial stability (Nwani 1973 [12], Gurley and Shaw 1976 [13]; Rogers et al 2005 [10]). They underscored the importance of attaining macroeconomic stability prior to financial deregulation.…”