Governance Quality and Banking Sector Development in Africa: Evidence from Regulatory Quality, Government Effectiveness and Rule of Law
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Abstract
This study examines the relationship between governance quality and banking sector development across 54 African countries over the period 2000 to 2020. Banking sector development is measured by bank credit to the private sector, while governance quality is captured by regulatory quality, government effectiveness and rule of law. Bank branches per 100,000 adults and interest rates are included as control variables. Panel cointegration tests indicate the existence of a long run relationship among the variables. The Panel ARDL estimates show that regulatory quality has a positive and statistically significant long run association with bank credit to the private sector, whereas government effectiveness, rule of law, bank branch density and interest rates have negative long run associations. In the short run, regulatory quality and rule of law are negatively associated with bank credit, while bank branch density and interest rates exhibit positive associations. The FMOLS and DOLS estimates provide a contrasting pattern: regulatory quality has a negative long run association with banking sector development, whereas government effectiveness, rule of law, bank branch density and interest rates have positive associations. The divergence between the baseline and alternative estimators indicates that the estimated relationships are sensitive to the estimation technique and should therefore be interpreted as statistical associations rather than causal effects. The findings highlight the importance of considering distinct dimensions of governance when assessing banking sector development and suggest that regulatory and institutional reforms should be designed in accordance with country specific financial and institutional conditions.
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