Financial Development, Institutional Quality and Inclusive Growth in Africa

We investigate the relationship between Financial Development (FD) and Inclusive Growth (IG) unlike extant literature whose concentration has been on economic growth, which we refer to as wholesale growth. While we examine the effect of FD on IG, we investigate the moderating role played by institutions and the regulatory ambience in conveying the strides of FD towards the poor. We measure IG through a social mobility function approach and also construct an IG Index using Asian Development Bank’s framework of IG for robustness. We employ a 27-year panel data collected from across 48 African countries in our dynamic estimations of the FD-IG nexus. We find a non-linear relationship between finance and IG. Our results show that for FD to lead to IG, there is the need to have an effective institutional setup that regulates financial market participants to be inclusive in their operations. With weak institutions, FD’s effect on IG is negative. Our study does not just investigate how FD explains how much money there is overall, but how the money is shared across societies as well. This study is the first to examine the finance-growth nexus from the perspective of inclusivity. Practical policy implications are also discussed.