The Relationship between Financial Development and Economic Growth in Africa

Abstract

This study examines the relationship between financial development and economic growth. It
presents evidence on a cross section of 50 African countries whose data is available for the
period 1980-2008. Two proxies of financial development are employed: the ratio of credit to
the private sector to total GDP and the ratio of broad money (M2) to total GDP. We establish
a positive relationship between financial development and economic growth. However, we
find that the relationship between private sector credit and economic growth is much stronger
than the relationship between money supply and economic growth. In addition, we find that
the relationship between financial sector development and economic growth is bi-directional.
The results suggest that both the financial sector and the real sector are important in
influencing Africa’s current and future growth trajectory.