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Causality between Financial Inclusion, Financial Stability and Economic Growth in Sub-Saharan Africa

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  • Meshesha Demie Jima

    (Risk Management and Banking, Department of Finance, University of South Africa, Pretoria 0002, South Africa)

  • Patricia Lindelwa Makoni

    (Risk Management and Banking, Department of Finance, University of South Africa, Pretoria 0002, South Africa)

Abstract

Financial inclusion has become a policy agenda for financial stability and sustainable economic growth for the developing world. However, there seems to be a lack of consensus across the literature on the relationships between financial inclusion, financial stability and economic growth. Given the divergent views, this paper aims to examine the causal relationships between financial inclusion, financial stability and economic growth in the Sub-Saharan African (SSA) countries. In this study, panel data were used for twenty six selected SSA economies and a principal component analysis (PCA) was applied to construct a composite index for financial inclusion. In addition, an autoregressive distributed lags (ARDL) cointegration test was applied to examine the short- and long-run relationships between the variables of interest. Separate and joint Granger causality tests were used to assess the direction of causality. The result of the study indicated that there are both short-run and long-run relationships between financial inclusion, financial stability and economic growth in the SSA countries. Moreover, the Granger causality tests revealed that there are separate two-way causalities and joint uni-directional causalities, indicating complementarity between these variables. It is, therefore, necessary for policy makers, regulators and financial sector advisors to follow a holistic approach while developing and implementing policies and strategies that promote financial inclusion in order to attain sustainable economic growth in the region.

Suggested Citation

  • Meshesha Demie Jima & Patricia Lindelwa Makoni, 2023. "Causality between Financial Inclusion, Financial Stability and Economic Growth in Sub-Saharan Africa," Sustainability, MDPI, vol. 15(2), pages 1-13, January.
    • Handle: RePEc:gam:jsusta:v:15:y:2023:i:2:p:1152-:d:1028448
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