Interest-Rate Reforms and Financial Deepening in Botswana: An Empirical Investigation

20 Pages Posted: 8 Oct 2009

See all articles by Nicholas M. Odhiambo

Nicholas M. Odhiambo

University of South Africa

Oludele A. Akinboade

affiliation not provided to SSRN

Abstract

In this paper, we examine the impact of interest-rate reforms on financial deepening in Botswana, one of Africa's economic development success stories. We employ three proxies of financial deepening against deposit rate, a proxy for interest-rate reforms. The financial deepening in this study is defined as the increase in the relative size and role of the financial system in an economy. The empirical results of our study show that the impact of interest-rate reforms on financial deepening is sensitive to the variable used as a proxy for financial deepening. When the ratio of bank deposits to GDP (BD/GDP) is used as a proxy for financial deepening, the interest-rate reforms impact positively on the level of financial deepening. However, when the monetization variable (M2/GDP) and the ratio of the private sector credit to GDP (DCP/GDP) are used, the coefficient of the deposit rate in the financial deepening model turns out to be statistically insignificant. Overall, our results show that the positive impact of interest-rate reforms on financial deepening in Botswana is minimal. This outcome, though contrary to our expectations, is not surprising given the high level of population dependency in Botswana. Our results show that there is a strong negative relationship between the dependency ratio and financial deepening in Botswana.

Suggested Citation

Odhiambo, Nicholas M. and Akinboade, Oludele A., Interest-Rate Reforms and Financial Deepening in Botswana: An Empirical Investigation. Economic Notes, Vol. 38, Issue 1-2, pp. 97-116, February / July 2009. Available at SSRN: https://ssrn.com/abstract=1484241 or http://dx.doi.org/10.1111/j.1468-0300.2009.00211.x

Nicholas M. Odhiambo (Contact Author)

University of South Africa

Oludele A. Akinboade

affiliation not provided to SSRN

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