The Impact of the Banking Sector and Stock Market on Economic Growth

Abstract

This paper examines the impact of the financial system; the banking sector development and the stock market development on economic growth in 17 selected African countries from 1980-2017. The paper employs the panel auto-regressive distributed lag (ARDL) with the pooled mean group (PMG) estimator to explore the short and long-run relationship among the variables. The empirical findings reveal the existence of cointegration among the variables and show that stock market capitalization; a measure of the stock market development has a significant long-run relationship with economic growth and this supports the claims of (Arestis et al.,2001) that stock market capitalization is statistically important and positively correlated with economic growth. FDI also has a significant long-run relationship with economic growth. Bank credit, an indicator of the banking sector development has a significant short-run relationship with economic growth. This study suggests that African countries should ameliorate the credit allocation process by privatizing national banks, tightening credit management, and increase competition in the banking sector. Measures should also be put in place to minimize excessive volatility in stock prices which would allow the stock markets in the African countries to stimulate economic growth.

Keywords: panel autoregressive distributed lag (ARDL), stock market development, banking sector development, pooled mean group (PMG), economic growth.

JEL Classification: G21, O16, C33, O47

DOI: 10.7176/EJBM/13-8-02

Publication date: April 30^th 2021