Revisiting the Nexus Between Financial Development and Capital Formation in Selected Sub-Saharan African Countries

Abstract

This study revisits the connection between financial development and capital formation in selected Sub-Saharan African (SSA) countries spanning from 1990 to 2022. The study utilises the Augmented Mean Group (AMG) method to accommodate country-specific heterogeneity and cross-sectional dependence tests. Additionally, it incorporates the Dumitrescu-Hurlin causality test to assess causal relationships. The findings signify that credit to the private sector positively impacts capital formation, while bank efficiency and broad money supply exhibit negative effects. GDP per capita emerges as a critical factor for enhancing capital formation. Also, the study suggests that both private sector credit and GDP can serve as predictors of future capital formation in SSA nations. Additionally, the study identifies that both credit to the private sector and GDP Granger-cause capital formation in SSA countries. These findings suggest that policymakers should focus on improving financial development to boost capital formation in the region. This can be achieved by enhancing regulatory frameworks for transparency and investors’ confidence, improving access to credit through strong banking systems, promoting financial literacy programs, encouraging innovation in financial services, and developing capital markets for alternative financing options. This study provides up-to-date insights into the effects of financial sector development on capital formation in SSA. The reliability and applicability of its findings are enhanced by the inclusion of cross-sectional dependence and consideration of country-specific trends.