Explaining weak financial development in Africa

Abstract

This study seeks to determine the causes of weakness in financial system development on the African continent. The research specifically investigates whether endowments theory, inequality, openness and remittances explain Africa’s financial (under)development. Using Generalized Method of Moments (GMM) with a robust estimator for 48 African countries over a 12-year period, the results suggest that the traditional endowments theory does not explain financial development in African countries. Inequality is found to be detrimental to financial development, while trade openness and remittances are both individually positively linked with financial development. There is limited support for the benefits of financial openness to Africa’s financial development.

Keywords: Africa, economic growth, endowments, financial sector, inequality