Finance-institution-growth trilogy: time-series insights from South Africa

Purpose - This study examines the moderating effect of institutional quality on the finance-growth nexus in South Africa from 1986 to 2015. Design/methodology/approach - This study adopts unit root tests, cointegration test and autoregressive distributed lag (ARDL) model. Findings - The findings reveal that institutional quality constitutes a drain to the growth benefits of financial development (FD) in South Africa in the short-run while FD and institutional quality converge to enhance growth process of the country in the long-run. Also, the threshold of institutional quality beyond which institution stimulates strong positive impact of finance on growth is estimated to be 6.42 on a 10-point scale. Practical implications - This study, therefore, suggests that institutional quality matters in the way FD influences economic growth in South Africa. Hence, stakeholders are encouraged to trace and block lapses and loopholes in the institutional framework guiding financial system in South Africa so as to maximize growth benefits of FD. Originality/value - This study contributes to the extant studies by introducing a country-specific analysis into the empirical examination of how institutional quality influences the impact of FD on economic growth. Also, this study deviates from other studies by determining the threshold of institutional quality beyond which FD stimulates strong positive effect on economic growth in South Africa