The effect of financial development on economic growth: the case of South Africa

Kawamya, Ackim

The effect of financial development on economic growth: the case of South Africa

Master Thesis

2022

Abstract

This study examines the effect of financial development on economic growth in South Africa. South Africa is an interesting case study, as it provides a relatively rich environment in terms of data. While the finance and business sector has grown significantly in the last ten years becoming a major contributor to gross domestic product, the South African economy has been struggling to register positive output in the preceding years. The study utilizes an Autoregressive Distributed Lag approach to cointegration and a Solow model to consider the role of banks, financial institutions, and financial markets independently. The results reveal that financial institutions have a considerable role in fostering economic development in the long run in South Africa. Conversely, financial market indicators do not have long run effects on growth in South Africa and in the short run, financial markets negatively influence growth. High foreign participation in the financial markets including ease of capital flows and currency volatility could be reasons for this result.