Financial market evolution in Africa: Is it demand- following or supply-leading?

Abstract

In this paper, we examine the dynamic causal relationship between financial development and economic growth in French- and English-speaking African countries during the period 1990- 2014 – using a trivariate panel Granger-causality model. The study uses three proxies of financial development, namely: liquid liabilities (FD1), deposit money bank assets (FD2), and bank deposits (FD3) to examine this linkage. Our results show that the causality between financial development and economic growth differs significantly between English-speaking countries and French-speaking countries. When FD1 and FD3 are used as proxies for financial development, a demand-following response is found to predominate in both French- and English-speaking countries. However, when FD2 is used as a proxy, the study found a unidirectional causal flow from financial development to economic growth to prevail in Frenchspeaking African countries, but failed to find any causal relationship between financial development and economic growth in English-speaking countries in either direction.