The Relationship between Banking Sector Development and Economic Growth in Selected Sadc Countries: Panel Cointegration Approach (2005-2015)

Abstract

Thedebates on the relationship between financial sector development (FSD)and Economic Growth (EG) have been inconclusive and have not considered much the differences in income levels across countries and political stability as possible determinants of the relationship between banking sector development and economic growth. In the debates, few have focused on developing countries such as the Southern African Development Community (SADC) region. The study however examined the relationship between banking sector development (BSD) and economic growth (EG) in the SADC region using balanced panel data from 13 selected SADC countries for the period 2005 to 2014usingPanel Cointegration and Panel Dynamic Ordinary Least Squares estimation techniques.The results revealed along run relationship between EG and BSDfor the thirteen selected SADC countries. When M2 was used, a statistically significant positive relationship between BSD and EG in either direction for all the SADC countries was found. The findings suggest that BSD augments EG and that EG extends to BSD. When domestic credit to private sector by banks(BANK) was used, a statistically significant positive relationship was found in the forward direction only suggesting that banking sector led finance enhances economic growth. The relationship between EG and BSD in the selected SADC countries varies acrosscountries of different income groups. Granger Causality tests revealed that EG Granger Causes BSD. The results also revealed thatEG Granger Causes BSD in the low-income and the middle income group and for the upper-middle income group, a bi-directional causality was revealed, suggesting feedback mechanism between BSD and EG. On this basis policy priority should be centered on initiatives that promote economic growth.

Keywords:Financial Sector Development, Banking Sector Development, Economic growth, Panel Cointegration, Panel Dynamic Ordinary Least Squares and Granger causality.