The impact of domestic savings, financial depth, and financial innovation on economic growth in sub-Saharan African countries

Macauley, Rachel

The impact of domestic savings, financial depth, and financial innovation on economic growth in sub-Saharan African countries

Thesis / Dissertation

2025

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

This thesis empirically examines issues related to the impact of the financial sector on economic growth. Specifically, the three papers of this thesis presented in separate chapters are: 1) domestic savings and economic growth, 2) financial depth and economic growth, and 3) financial innovation and economic growth. The first paper: ‘Domestic savings and economic growth' investigates the threshold effect of domestic savings on economic growth in the Sub Saharan African (SSA) countries. This paper examines at what point do excessive domestic savings have detrimental effects on economic growth and in which cases can domestic savings be classified as excessive domestic savings. The dynamic panel threshold model is employed to empirically examine the threshold effect of domestic savings on economic growth. Using data from 35 SSA countries between the period of 1980 and 2022, this study concludes that there is a threshold effect in the relationship between domestic savings and economic growth. This means that domestic savings promote economic growth if domestic savings are below the threshold. Conversely, domestic savings may have positive but insignificant effects on economic growth if they are above the threshold. However, the threshold effects on economic growth are dynamic, it should be revised as countries move from one income level to another, for instance low-income countries may move to a middle-income or upper-income category, which may increase the countries' domestic saving rates and may require higher thresholds. The second paper: ‘Financial depth and economic growth' examines the impact of financial depth on economic growth in Ebola-affected SSA countries, namely Liberia, Sierra Leone and Guinea. This paper examines the impact of financial depth on economic growth before-during-and-after a public health crisis. To get a clear picture on whether the Ebola period resulted in different dynamics in the relationship between financial depth and economic growth, this study examines two samples: the full sample (spanning from 1980 to 2022 comprises of the pre-and-post Ebola and COVID-19 eras) and the pre-Ebola era (1980 – 2014 which excludes the public health crisis period). The results show that the positive relationship between financial depth and economic growth in the pre-Ebola period is stronger than in the full sample. This difference means that financial depth significantly promoted economic growth before the public health crisis, and that the Ebola crisis did not only claim lives but also impacted the financial depth–economic growth relationship. Therefore, the main finding of this study is that financial depth positively impacts economic growth; however, infectious diseases such as Ebola can disrupt the relationship. The Granger causality results depict that a unidirectional causality from financial depth to economic growth is found in Guinea and Liberia while a bidirectional relationship exists between financial depth and economic growth in Sierra Leone. The third paper: ‘Financial innovation and economic growth' considers the symmetric (same magnitude) and asymmetric (different magnitude) impacts of financial innovation on economic growth in SSA countries. The asymmetric impact, unlike the symmetric impact, decomposes financial innovation into positive and negative components to examine how economic growth reacts to these components of financial innovation. This study employs the linear autoregressive distributed lag (ARDL) model to test for the symmetric relationship between financial innovation and economic growth. The non-linear autoregressive distributed lag (NARDL) model tests for the asymmetric relationship between the two variables. Using data from 20 SSA countries between the period of 1990 and 2020, this study concludes that financial innovation has a symmetric impact on economic growth in SSA, the relationship is positive and statistically significant in the long-run. The result of the asymmetric impacts of the two variables shows that an increase in financial innovation has a positive and significant impact on economic growth in both the short-run and long-run. In the long-run, a decrease in financial innovation has a negative asymmetric relationship with economic growth.