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Financial sector development and economic growth nexus in South Africa

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  • Sunde, Tafirenyika

Abstract

The main purpose of this study was to establish the nexus between financial sector development and economic growth in South Africa. The main motivation of the study is that although many studies on this nexus have been carried out in both developed and developing countries very few similar studies have been carried out in Sub-Saharan countries which include South Africa. This has led to the dearth of relevant literature in Sub-Saharan Africa. Cointegration and error correction methodology together with Granger causality tests were used to establish how economic growth and financial sector development are related in South Africa. The results of the study show that economic growth is explained by the financial sector variables (broad money stock as a percentage of GDP and total credit to the private sector as a percentage of GDP) and control variables (inflation, exchange rate, and real interest rates). The Granger causality test results show that there is generally a bidirectional relationship between economic growth and financial sector development which implies that if the economy grows the financial services sector also grows and vice versa. We recommend that more studies using more growth and financial indicators than the ones included in this study need to be carried out using the same methodology applied in this study. In addition, the role of equity markets in economic growth also needs to be investigated.

Suggested Citation

  • Sunde, Tafirenyika, 2012. "Financial sector development and economic growth nexus in South Africa," MPRA Paper 86633, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:86633
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    Cited by:

    1. Amar Anwar & Ichiro Iwasaki, 2023. "The finance–growth nexus in the Middle East and Africa: A comparative meta‐analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4655-4683, October.
    2. Nahid Ferdousi & Tuli Chakma & Md. Raseduzzaman, 2014. "An Empirical Analysis between Banking Sector Development and Growth Rate of GDP in Bangladesh," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 2(3), pages 94-113.
    3. Andrew Phiri, 2015. "Asymmetric cointegration and causality effects between financial development and economic growth in South Africa," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 32(4), pages 464-484, October.
    4. Nazima Ellahi & Adiqa Kausar Kiani & Muhammad Awais & Hina Affandi & Rabia Saghir & Sarah Qaim, 2021. "Investigating the Institutional Determinants of Financial Development: Empirical Evidence From SAARC Countries," SAGE Open, , vol. 11(2), pages 21582440211, April.
    5. Emmanuel Asafo-Adjei & Ebenezer Boateng & Zangina Isshaq & Anthony Adu-Asare Idun & Peterson Owusu Junior & Anokye M Adam, 2021. "Financial sector and economic growth amid external uncertainty shocks: Insights into emerging economies," PLOS ONE, Public Library of Science, vol. 16(11), pages 1-26, November.
    6. Ogunyiola, Ayorinde, 2013. "Financial development and Economic Growth: The Case of Cape Verde," MPRA Paper 49783, University Library of Munich, Germany.
    7. Peter Ego Ayunku, 2018. "The Nexus between Financial Sector Development and Economic Growth in Nigeria: A Cointergration Approach," Noble International Journal of Social Sciences Research, Noble Academic Publsiher, vol. 3(8), pages 55-70, August.
    8. Lukman Ayinde Olorogun, 2022. "Revisiting the Nexus of FDI-Led Growth Hypothesis and Economic Development in Rwanda: a Johansen-ARDL Approach to Cointegration," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(4), pages 2695-2717, December.
    9. Okuma, N. Camillus & Nwoko, Cyprain N.J & Ubogu Festus Elugom & Asomba Sebastine Uche, 2019. "Causality between Financial Inclusion and Agricultural Sector Output in Nigeria," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 9(4), pages 304-317, April.
    10. repec:asi:ajoerj:2013:p:752-762 is not listed on IDEAS
    11. repec:mth:ijafr8:v:8:y:2018:i:4:p:399-423 is not listed on IDEAS
    12. Joanna Wyszkowska-Kuna, 2016. "Financial Services Input as a Source of Economic Growth in the European Union Countries," FindEcon Chapters: Forecasting Financial Markets and Economic Decision-Making, in: Magdalena Osińska (ed.), Statistical Review, vol. 63, 2016, 3, edition 1, volume 63, chapter 3, pages 289-308, University of Lodz.
    13. IWASAKI, Ichiro & ONO, Shigeki, 2023. "Economic Development and the Finance-Growth Nexus : A Meta-Analytic Approach," CEI Working Paper Series 2023-06, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    14. Abdelghani Echchabi & Dhekra Azouzi, 2015. "Islamic Finance Development and Economic Growth Nexus: The Case of the United Arab Emirates (UAE)," American Journal of Economics and Business Administration, Science Publications, vol. 7(3), pages 106-111, August.
    15. K. Siva Kiran Guptha & R. Prabhakar Rao, 2018. "The causal relationship between financial development and economic growth: an experience with BRICS economies," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 20(2), pages 308-326, October.

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    More about this item

    Keywords

    Growth; financial development; cointegration; error correction; South Africa.;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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