The effect of Financial Development on Pro-Poor Growth: evidence from Sub-Saharan African Countries

ABSTRACT

This paper extends the empirical analysis establishing the significant and positive/negative influence of finance on growth/poverty by examining the contribution of financial development to pro-poor growth. We investigate the relationship between financial development and pro-poor growth in a panel of 29 countries from sub-Saharan Africa over the period 1994–2019. We focus on the vast majority income as the main indicator of pro-poor growth. We use the recent financial development index as a measure of financial development. Using Pooled Mean Group-ARDL estimation in a dynamic heterogeneous panel framework, we obtain the following results: (i) from linear analysis, there is a positive and significant effect of financial access, financial efficiency and the overall financial development index on pro-poor growth in the short run, while in the long run, only financial efficiency affects negatively and significantly pro-poor growth; (ii) results show that the nonlinear relation is not verified in the short run, while in the long run, there is an inverted U-shaped relationship between the financial development index, financial access and financial depth and pro-poor growth. This suggests that too much finance can be detrimental to pro-poor growth in SSA. Financial inclusion of the poor combined with governance is necessary to improve pro-poor growth.

KEYWORDS:

• ARDL
• financial development index
• pro-poor growth
• vast majority income

JEL CLASSIFICATION:

• C13
• C20
• C23
• G20
• I30

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ It assesses the relative gains between people above and below the poverty line.

² It limits the analysis to the absolute gains of the people below the poverty line.

³ There are five functions that financial systems provide to facilitate and sustain growth: mobilizing and pooling saving; producing information ex ante about possible investment and allocating capital; monitoring investments and exerting corporate governance; facilitating the trading, diversification and management of risks and facilitating the exchange of goods and services (Levine 2004).