Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC

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dc.contributor.advisorAbraham, Haimen_ZA
dc.contributor.authorMahawiya, Sulemanaen_ZA
dc.date.accessioned2016-07-25T11:32:34Z
dc.date.available2016-07-25T11:32:34Z
dc.date.issued2016en_ZA
dc.description.abstractThe focus of this study is two-fold. First, it examines the relationship between financial development and growth. Second, it investigates the role of foreign banks, inflation and openness in the state of financial development. The above are discussed in relation to a comparative study of regional economic blocs of Economic Community of West African States (ECOWAS) and Southern African Development Community (SADC) in three essays for the period 1980-2011. The dissertation comprises four essays as stated below. Existing studies on financial system development usually rely on single measure of financial development which is inadequate in capturing the financial system properly and leads to mixed results. This research addresses this critical issue by constructing a composite measure of the variable. The first essay provides a comparative analysis on the impact of financial development on growth and development between the two regions. In addition, it investigates the influence of financial development through political development on growth. The motivation stem s not only from inadequate studies on regional economic blocs, but, importantly, the methods applied in previous panel studies ignored issues of heterogeneity. To address this, the study employ s a combination of methodologies, Pooled Mean Group, Mean Group and Dynamic Fixed Effect approaches. These approaches also capture both the short run and long run dynamics. The results indicate that financial development induces economic growth in both regions with the impact in SADC more than that of ECOWAS. Also, more political development robustly supports more financial sector to impact on growth positively in ECOWAS, but not in SADC. Finally, the speed of adjustment suggests that deviations from the long run equilibrium path following a shock are corrected at about 13% per year in ECOWAS and 15% in SADC The second essay, which is another comparative study, addresses the question of why some countries having underdeveloped financial systems after it has been established that the sector is vital for growth. SSA has one of the least developed financial systems, and, since the first essay documented that indeed the sector is crucial to growth, the main aim of this essay is to investigate whether inflation and openness to trade and financial system (that is, Rajan and Zingales Hypothesis) matter for financial development. Importantly, the effects of the growing communication infrastructure on financial development is also captured, which is a novelty. Four approaches were used: Least square dummy variable, Feasible GLS, Panel corrected standard errors and seemingly unrelated regression. The main findings provide evidence that in both regions inflation robustly reverse s financial development with the effect in ECOWAS much more. Overall, the results seem to indicate that the cost of inflation to the financial system is genuine and not explained by a sort of omitted variable bias. Access to communication indicated a strong positive effect on financial development in both regions, with the impact in SADC more. Finally, the study indicates that even though more simultaneous opening of the financial sector and trade lead to more financial development in SADC, trade openness alone still enhances development in the sector. However, more financial openness alone is detrimental to financial development in the region. Hence, this seems to provide partial support for the hypothesis in SADC. The hypothesis, however, is rejected in ECOWAS. The third essay examines the asymmetric effects of inflation on financial development. It is motivated by existing theories which posit that the detrimental effects of inflation on the financial development is only observed beyond certain threshold level. The study is the first of its kind to be conducted on SSA, especially on regional economic blocs. Using a novel Panel smooth transition regression that endogenously determines this threshold value, a comparative study is conducted between the two regions. The results suggest evidence of the existence of a robust single threshold of 17.9% inflation for ECOWAS and 14.5% for SADC. The result indicates that inflation above these thresholds presents significant detrimental effects for financial development in both regions. The last essay focuses on financial sector stability via banking sector stability. It is motivated by the evidence that the financial system of the two regions are bank based which is also over 50% foreign bank dominated. Specifically, the essay investigates the effects of foreign banking inflows on banking crisis (financial instability) of both regions for the period 1995-2009. This objective is informed by the widely held conventional wisdom that foreign banks lack long term commitment to the domestic financial system and will leave at the first sign of trouble. This can stir instability in the sector. The study employs two econometric approaches, namely, the multivariate logit and the t wo-step system generalised method of moment using bank crisis measure constructed by Laeven and Valencia (2012) and bank z-score (Bankscope). The main results of the methods indicate evidence that the presence of foreign banks in the domestic banking sector reduces the probability of bank crisis. Generally, the results reveal that the benefits from the foreign banks in the financial system are unaffected by any sort of omitted variable bias. This study has significant implication for policy formulation since it is the first study on comparative analysis between two regional economic groups in SSA. The study argues that more efforts should be committed in improving the financial system and governance. Improvement in the legal system can enhance financial development and this should be coupled with good macroeconomic policies. The study recommends that price stability policies with inflation targeting framework that falls below the estimated threshold, should be the primary objective in monetary policy. Furthermore, more investment into telecommunication industry is necessary for FSD and should be given attention. In terms of foreign banking inflows, the study advocates for a cautious approach towards attracting more foreign banks as well as more opening of the financial sector.en_ZA
dc.identifier.apacitationMahawiya, S. (2016). <i>Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,School of Economics. Retrieved from http://hdl.handle.net/11427/20713en_ZA
dc.identifier.chicagocitationMahawiya, Sulemana. <i>"Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC."</i> Thesis., University of Cape Town ,Faculty of Commerce ,School of Economics, 2016. http://hdl.handle.net/11427/20713en_ZA
dc.identifier.citationMahawiya, S. 2016. Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC. University of Cape Town.en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Mahawiya, Sulemana AB - The focus of this study is two-fold. First, it examines the relationship between financial development and growth. Second, it investigates the role of foreign banks, inflation and openness in the state of financial development. The above are discussed in relation to a comparative study of regional economic blocs of Economic Community of West African States (ECOWAS) and Southern African Development Community (SADC) in three essays for the period 1980-2011. The dissertation comprises four essays as stated below. Existing studies on financial system development usually rely on single measure of financial development which is inadequate in capturing the financial system properly and leads to mixed results. This research addresses this critical issue by constructing a composite measure of the variable. The first essay provides a comparative analysis on the impact of financial development on growth and development between the two regions. In addition, it investigates the influence of financial development through political development on growth. The motivation stem s not only from inadequate studies on regional economic blocs, but, importantly, the methods applied in previous panel studies ignored issues of heterogeneity. To address this, the study employ s a combination of methodologies, Pooled Mean Group, Mean Group and Dynamic Fixed Effect approaches. These approaches also capture both the short run and long run dynamics. The results indicate that financial development induces economic growth in both regions with the impact in SADC more than that of ECOWAS. Also, more political development robustly supports more financial sector to impact on growth positively in ECOWAS, but not in SADC. Finally, the speed of adjustment suggests that deviations from the long run equilibrium path following a shock are corrected at about 13% per year in ECOWAS and 15% in SADC The second essay, which is another comparative study, addresses the question of why some countries having underdeveloped financial systems after it has been established that the sector is vital for growth. SSA has one of the least developed financial systems, and, since the first essay documented that indeed the sector is crucial to growth, the main aim of this essay is to investigate whether inflation and openness to trade and financial system (that is, Rajan and Zingales Hypothesis) matter for financial development. Importantly, the effects of the growing communication infrastructure on financial development is also captured, which is a novelty. Four approaches were used: Least square dummy variable, Feasible GLS, Panel corrected standard errors and seemingly unrelated regression. The main findings provide evidence that in both regions inflation robustly reverse s financial development with the effect in ECOWAS much more. Overall, the results seem to indicate that the cost of inflation to the financial system is genuine and not explained by a sort of omitted variable bias. Access to communication indicated a strong positive effect on financial development in both regions, with the impact in SADC more. Finally, the study indicates that even though more simultaneous opening of the financial sector and trade lead to more financial development in SADC, trade openness alone still enhances development in the sector. However, more financial openness alone is detrimental to financial development in the region. Hence, this seems to provide partial support for the hypothesis in SADC. The hypothesis, however, is rejected in ECOWAS. The third essay examines the asymmetric effects of inflation on financial development. It is motivated by existing theories which posit that the detrimental effects of inflation on the financial development is only observed beyond certain threshold level. The study is the first of its kind to be conducted on SSA, especially on regional economic blocs. Using a novel Panel smooth transition regression that endogenously determines this threshold value, a comparative study is conducted between the two regions. The results suggest evidence of the existence of a robust single threshold of 17.9% inflation for ECOWAS and 14.5% for SADC. The result indicates that inflation above these thresholds presents significant detrimental effects for financial development in both regions. The last essay focuses on financial sector stability via banking sector stability. It is motivated by the evidence that the financial system of the two regions are bank based which is also over 50% foreign bank dominated. Specifically, the essay investigates the effects of foreign banking inflows on banking crisis (financial instability) of both regions for the period 1995-2009. This objective is informed by the widely held conventional wisdom that foreign banks lack long term commitment to the domestic financial system and will leave at the first sign of trouble. This can stir instability in the sector. The study employs two econometric approaches, namely, the multivariate logit and the t wo-step system generalised method of moment using bank crisis measure constructed by Laeven and Valencia (2012) and bank z-score (Bankscope). The main results of the methods indicate evidence that the presence of foreign banks in the domestic banking sector reduces the probability of bank crisis. Generally, the results reveal that the benefits from the foreign banks in the financial system are unaffected by any sort of omitted variable bias. This study has significant implication for policy formulation since it is the first study on comparative analysis between two regional economic groups in SSA. The study argues that more efforts should be committed in improving the financial system and governance. Improvement in the legal system can enhance financial development and this should be coupled with good macroeconomic policies. The study recommends that price stability policies with inflation targeting framework that falls below the estimated threshold, should be the primary objective in monetary policy. Furthermore, more investment into telecommunication industry is necessary for FSD and should be given attention. In terms of foreign banking inflows, the study advocates for a cautious approach towards attracting more foreign banks as well as more opening of the financial sector. DA - 2016 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2016 T1 - Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC TI - Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC UR - http://hdl.handle.net/11427/20713 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/20713
dc.identifier.vancouvercitationMahawiya S. Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC. [Thesis]. University of Cape Town ,Faculty of Commerce ,School of Economics, 2016 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/20713en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentSchool of Economicsen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherEconomicsen_ZA
dc.titleForeign banking inflows, financial sector development and economic growth in ECOWAS and SADCen_ZA
dc.typeDoctoral Thesis
dc.type.qualificationlevelDoctoral
dc.type.qualificationnamePhDen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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