Financial Structure and Economic Development in Africa

This paper explores the relationship between economic development and financial structure: that is, whether the degree of financial system structure matter for pace and character of economic development in 15 African countries for the period of 1995 to 2011. The paper utilizes the fixed effect instrument variable technique for econometric estimation. None of the financial structure indicators enters any of the economic development regressions significantly at the conventional 10% level, which is inconsistent with bank-based and market-based system view of financial system. Therefore, financial structure does not matter for economic development in these African countries. Rather, financial services are a significant determinant of economic development for our sample of 15 African countries. The overarching policy implication therefore is that relevant authorities should invest in accumulating both quantity and quality financial services in order to impact economic development in Africa.