DR. ASIAMA MAURITIUS FINAL

PowerPoint Presentation: 

Johnson P. Asiama and Hakeem I. Mobolaji 1 Openness, Institutional Quality and Financial Development in Sub-Sahara Africa (SSA )

PowerPoint Presentation: 

Introduction Trends in financial development in SSA Literature Methodology and Results (model, data, empirical results) Conclusion and Policy recommendations 2 Outline of Presentation

PowerPoint Presentation: 

Finance – Growth nexus well established in literature Effort now shifting towards exploring the determinants of financial development itself. The literature so far identifies a number of factors as potential determinants: Legal history Role of institutions Political economy factors Geographical factors Cultural factors Macroeconomic factors (trade and financial openness, inflation, etc.) 3 Introduction (continued)

Introduction: 

Introduction Motivation for study One key result reported in the empirical literature on the impact of trade openness on financial development, implied that openness promotes financial development in rich countries but in poor countries, openness appeared to constrain financial development (Beck, 2003; Do and Levchenko , 2004). “… when a wealthy and a poor country open to trade, the financially dependent sectors grow in the wealthy country, and so does the financial system. By constrast , as the financially intensive sectors shrink in the poor country, demand for external finance decreases and the domestic financial system deteriorates” . 4

Financial Development in SSA: 

Financial Development in SSA 5

Financial Development in SSA: 

Financial Development in SSA 6 (continued)

Financial Development in SSA: 

Financial Development in SSA 7

Financial Development in SSA: 

Financial Development in SSA 8

Financial Development in SSA: 

Financial Development in SSA 9

Financial Development –Advanced Countries: 

Financial Development –Advanced Countries 10

Literature : 

Literature Potential Determinants of FD : legal history, historical health conditions, institutions, political economy factors, geographical factors, cultural factors, and macroeconomic factors i.e. trade and financial openness, inflation, monetary policy efficiency, capital account liberalisation etc. Legal History - La Porta et al (1998) Trade and financial openness - Rajan and Zingales (2003 ); Law and Demetriades ( 2006; Huang (2006); . Inflation – Padachi et al (2008) Institutions – Beck et al (2003) Cultural Factors – Stulz and Williamson (2003); Tawney (1954) Geography – Mobolaji (2010), Merton and Bodie (1995) Health Conditions – Acemoglu et al (2001) 11

BRIEF REVIEW OF LITERATURE: 

BRIEF REVIEW OF LITERATURE Raju Jan Singh et al (2010) – explored role of institutions in financial deepening in CFA Franc zone. Ghazouani (2004) – inflation had a negative impact on FD for 11 MENA countries. But no threshold effect. Padachi et al (2008) – reported evidence of threshold effect for Mauritius. Huang (2005) – reported that FD positively impacted by wide range of variables such as IQ, macro policy, geography, income and culture Law and Demetriades (2006) –openness and institutions are key determinants of FD Rajan and Zingales (2003) – more openness leads to financial development and higher growth Baltagi et al (2007) – simultaneous opening of trade and financial flows have positive impact on FD. Carranza et al (2006) – in countries with poorly developed financial markets, a monetary contraction policy has a larger impact on credit than expansions. 12

Methodology: 

Methodology Reduced form model, dynamic log-linear in the form: (1) FD is financial devt ; Y is per capita income; TO is trade openness; FO is financial openness; and CPIA measures institutional quality. Lagged FD captures partial adjustment to long run equilibrium. Hence all beta coefficients are short-run effects. Long run effects can be obtained by dividing each beta by 13

Methodology: 

Methodology To test the simultaneity hypothesis, a second model is specified as; Simultaneity hypothesis implies that both derivatives are positive for countries already open to trade and capital flows. In other words, the marginal effect of greater trade (financial) openness is larger the more open the capital (trade) account 14 -

Results – Private sector credit: 

Results – Private sector credit For credit to the private sector, results suggest high persistence, trade openness has more effect on financial development than financial openness. There is no evidence to support the Rajan-Zingales hypothesis, and hence no evidence that simultaneous trade and financial openness would enhance financial development in the region. Low institutional quality has a negative impact on financial development 15

Results – Private sector credit: 

Results – Private sector credit 16 FD Proxied by Private Credit ( as a % of GDP) Specification 1(a) 1(b) 2(a) 2(b) 3 4(a) 4(b) Ln FD it-1 0.89*** (0.01) 0.95*** (0.02) 0.89*** (0.02) 0.90*** (0.03) 1.02*** (0.02) 0.87*** (0.02) 0.87*** (0.02) Ln Y it 0.05*** (0.01) -0.05 (0.04) -0.45** (0.01) -0.003 (0.02) -0.07** (0.03) 0.06*** (0.02) -0.03 (0.03) Ln TO it 0.28*** (0.04) 0.19*** (0.04) 0.35*** (0.09) -0.15*** (0.02) 9.37*** (1.32) Ln FO it -0.004 (0.002) 0.007** (0.003) 0.88*** (0.1) 0.03* (0.015) -0.02*** (0.01) Ln FO it *ln TO it -0.21** (0.02) CPIA it -0.20* (0.11) Ln FO 2 it -0.01** (0.004) -1.08** Ln TO 2 it (0.15) Sargan Test (p-Value) 13.69 (0.47) 23.19 (0.41) 21.89 (0.42) 18.21 (0.19) 13.68 (0.47) 15.82 (0.32) 19.49 (0.15) Autocovariance of Order 1 0.92 0.89 0.98 0.21 0.11 0.99 0.53 Autocovariance of Order 2 0.03 0.07 0.04 0.78 0.16 0.09 0.74

Results - Liquid Liabilities: 

Results - Liquid Liabilities Using liquid liabilities as a measure of financial development, trade openness shows significant impact on FD while financial openness suggests otherwise. The institutional quality variable has expected sign, suggesting that strong institutions could be beneficial for FD in the region. Again, there was no evidence for the Rajan-Zingales hypothesis. 17

Results – Liquid Liabilities: 

Results – Liquid Liabilities 18 Financial Development proxied by Liquid Liabilities as a % of GDP Specification 1(a) 1(b) 2(a) 2(b) 3 4(a) 4(b) Ln FD it-1 0.53*** (0.01) 0.49*** (0.01) 0.48*** (0.01) 0.48*** (0.01) 0.42*** (0.01) 0.53*** (0.01) 0.49*** (0.01) Ln Y it 0.05*** (0.01) 0.06 (0.06) 0.06 (0.01) 0.06 (0.01) 0.07*** (0.01) 0.06*** (0.01) 0.06*** (0.01) Ln TO it 0.08 (0.05) 0.15*** (0.09) 0.14** (0.04) 0.15*** (0.05) -0.50* (0.28) Ln FO it -0.01** (0.002) -0.006 (0.004) 0.013 (0.04) -0.002 (0.002) -0.005*** (0.001) Ln FO it *ln TO it -0.05 (0.01) CPIA it -0.16*** (0.03) Ln FO 2 it 0.002** (0.004) 0.07** Ln TO 2 it (0.03) Sargan Test (p-Value) 18.47 (0.18) 11.70 (0.63) 14.25 (0.43) 13.79 (0.46) 13.14 (0.51) 20.08 (0.12) 12.08 (0.59) Autocovariance of Order 1 0.39 0.50 0.43 0.42 0.95 0.45 0.50 Autocovariance of Order 2 0.34 0.33 0.34 0.34 0.32 0.30 0.35

Results – Broad Money: 

Results – Broad Money Finally, broad money as a measure of FD also suggests that trade openness is positive but statistically insignificant. Strikingly , financial openness enters with a positive sign and there appears to be support for the Rajan-Zingales hypothesis. The institutional quality variable still has the expected sign, suggesting that weak institutions retard financial devt in the region. 19

Results – Broad Money: 

Results – Broad Money 20 Broad Money ( as a % of GDP) Specification 1(a) 1(b) 2(a) 2(b) 3 4(a) 4(b) Ln FD it-1 0.91*** (0.03) 0.99*** (0.04) 0.96*** (0.04) 0.97*** (0.03) 0.92*** (0.02) 0.92*** (0.03) 0.93*** (0.06) Ln Y it -0.13 (0.01) -0.06** (0.01) -0.06** (0.02) -0.06 (0.01) -0.10*** (0.03) -0.03** (0.01) -0.04* (0.02) Ln TO it 0.05 (0.05) 0.05 (0.05) -0.03 (0.06) 0.008 (0.05) 2.84*** (1.00) Ln FO it 0.02** (0.01) 0.02** (0.01) -0.22** (0.08) 0.006 (0.008) 0.31*** (0.01) Ln FO it *ln TO it 0.06*** (0.02) CPIA it -0.25*** (0.06) Ln FO 2 it 0.01*** (0.001) -0.34** Ln TO 2 it (0.12) Sargan Test (p-Value) 20.66 (0.11) 20.17 (0.12) 18.68 (0.17) 18.89 (0.16) 20.34 (0.11) 21.03 (0.10) 19.83 (0.14) Autocovariance of Order 1 0.04 0.09 0.14 0.23 0.31 0.04 0.11 Autocovariance of Order 2 0.03 0.01 0.01 0.02 0.10 0.06 0.01

Summary of Results: 

Summary of Results In summary, for all financial devt indicators, there is evidence of strong persistence. Trade and financial openness boosts financial devt . Using private sector credit as a measure of financial devt , trade openness is positive and statistically significant. Weak institutional quality impacts negatively on FD and vice versa. 21

Policy Recommendations: 

Policy Recommendations Openness is good for financial development; quality of legal and regulatory institutions is good for FD. There is need for concerted efforts to improve institutional quality Especially framework for enforcement of credit contracts and property rights, and reduce information asymmetry in credit delivery. regulatory and supervisory framework be strengthened as progress is made in financial deepening. 22