Governance, Financial Liberalization, and Financial Development in Sub-Saharan Africa

Abstract

An analysis of the roles of governance and financial liberalization in the financial development of 37 Sub-Saharan Africa (SSA) countries yields several interesting results using data from 1996 to 2008. Contrary to previous studies, financial liberalization did not have a favorable independent impact on financial development; overall, financial liberalization efforts reduced financial development, particularly from 1996 to 2002. But, good governance has improved financial development over time, especially due to reduced political instability. The effect of the origin of legal systems suggests that civil laws are less favorable to financial development than mixed legal systems that include both civil and common laws. From 1996 to 2002, the impact of financial liberalization was reduced with good governance, probably due to governments’ forbearance of weak state-owned banks; but, since 2003 good governance has increased the impact of financial liberalization on financial development. Finally, the banking crises that affected a large number of countries about two decades ago may have had protracted effects on financial development, particularly, liquid liabilities.

Keywords: Financial Development, Financial Liberalization, Governance, Sub-Saharan Africa

JEL Classification: G21, G28, O16, O55