Financial structure, economic growth and firm productivity in Sub Saharan Africa

Mathenge, Naomi Muthoni

Financial structure, economic growth and firm productivity in Sub Saharan Africa

Doctoral Thesis

2018

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

Over the years, an extensive body of literature has emerged on the role that financial structure, the blend of bank-based and market-based intermediation, plays in economic growth. However, there has been no general agreement on this role. Some studies find that financial intermediaries and markets are both important for growth while some other studies claim the superiority of one type of financial system (bank-based or market based) over the other. There are also studies that argue that financial structure does not matter while some more recent studies show that too much finance may harm growth. The debate is important, as having some idea of the form of financial structure that is growth promoting can help policy makers take informed decisions. It is also a particularly important issue for developing countries, as choosing the wrong financial structure can hold back growth and development. The existing literature tends to focus on developed countries, however, with only a few studies considering developing countries or regions. Even fewer consider Sub Saharan Africa (SSA). In the past, this was mainly because of inadequate stock market data, as most SSA countries did not have stock markets. Since the 1980s, however, this has changed, with stock markets being established in many SSA countries. This thesis contributes to the financial structure and economic growth literature by providing empirical evidence from SSA. The thesis is structured around three related studies. The first study uses dynamic panel estimation techniques to investigate both the short and long-run effects of financial structure on growth, focusing on 14 SSA countries over the period 1980-2014. The results indicate that financial structure is not significant in explaining growth in the region. This could be attributed to the idiosyncratic nature of SSA banks, which are reluctant to lend to the private sector and prefer to invest in safe, risk-free government securities. It could also be a result of stringent stock market listing requirements that prevent most small and medium enterprises from raising funds. Cross country panel studies are valuable to investigate this further. However, it is important to consider the heterogeneous nature of countries in a panel, and the limits that cross country studies put on the variables that can be considered. For this reason, the second study focuses on a single country from SSA, Kenya, and offers a more detailed analysis using quarterly data for the period 2002-2014. Kenya has not been analysed in the relevant literature. The country is an interesting case study, as it has experienced a number of financial innovations and has a relatively well-developed financial system, but still faces low levels of development. Our study employs the Autoregressive Distributed Lag approach to cointegration, and considers the independent role of banks and of markets, along with the role of financial structure. Our findings are consistent to those of the panel study concerning the role of financial structure. Stock market development is, however, found to have a significantly positive effect on the country's economic growth. This is possibly because Kenya was one of the first SSA countries to develop an alternative investment market aimed at small and young firms. The role of banking sector development has a negative effect. This finding can be partly explained by the large proportion of non-performing loans accumulated by Kenyan banks in the 1980's and the 1990's, along with a weak legal and regulatory framework. The development of stock markets could have impacted upon growth in SSA economies through the provision of more financing choices for firms. This could influence their productivity and growth. To consider this channel in detail, the third study uses firm level data from the World Bank Enterprise Survey (WBES) to investigate the effect of different financing choices on the productivity of SSA firms. Using data for the period 2005 - 2013 from 26 countries, the study employs a linear Cobb-Douglas production function to estimate total factor productivity (TFP.) It then uses both parametric and non-parametric methods to analyse the effect of financing choices on TFP. The results indicate that firms that rely on bank debt rather than other forms of financing (e.g. internal finance, informal finance, private and public equity) are, on average, more productive. This can be partly attributed to the monitoring activities of banks and the threat of bankruptcy faced by firms.

Keywords

Economics

Reference:

Collections

PhD / Doctoral

Full item page