Nicholas M. Odhiambo

Is financial development a spur to poverty reduction? Kenya's experience

Purpose - The paper seeks to examine the inter-temporal causal relationship between financial development and poverty reduction in Kenya during the period 1968-2006. The study attempts to answer one critical question: is financial development in Kenya a spur to poverty reduction? Design/methodology/approach - The study uses a trivariate causality model based on cointegration and error-correction mechanism. Unlike the majority of the previous studies, the current study incorporates the savings rate as an intermittent variable in the bivariate causality setting between financial development and poverty reduction – thereby creating a simple trivariate causality model. Findings - The study finds a distinct causal flow from financial development to poverty reduction in Kenya. In addition, the study finds a uni-directional causality from financial development to savings and a bi-directional causality between savings and poverty reduction. The results apply irrespective of whether the causality test is conducted in the short run or in the long run. Practical implications - The empirical results of this study will help policy makers to determine whether the financial development in Kenya is pro-poor and pro-savings. Originality/value - Although several attempts have been made to investigate the relationship between financial development, savings, economic growth and other macroeconomic variables, very few studies have examined the impact of financial development on the ultimate policy goal, i.e. poverty reduction. Moreover, the majority of the previous studies are based mainly on Asia and Latin America – affording sub-Saharan African countries very little or no coverage at all.

Financial deepening and poverty reduction in Zambia: an empirical investigation

Purpose - The purpose of this paper is to examine the inter-temporal causal relationship between financial sector development and poverty reduction in Zambia. The paper attempts to answer one critical question: does financial sector development in Zambia lead to poverty reduction? Design/methodology/approach - The paper uses the newly developed autoregressive distributed lag-bounds testing procedure, which has numerous advantages, especially when the sample size is small. In addition, the paper uses three proxies of financial development, namely broad money supply (M2/GDP), domestic credit to the private sector as a ratio of gross domestic product (DCP/GDP) and domestic money bank assets (DMBA), against private per capita consumption, a proxy for poverty reduction. Findings - When the broad money supply ratio (M2/GDP) is used as a proxy for financial sector development, poverty reduction seems to cause the development of the financial sector. However, when the DCP and the DMBA are used, financial development seems to cause poverty reduction, and not the other way round. Practical implications - The empirical results of this paper show that the causal relationship between financial development and poverty reduction is sensitive to the choice of proxy used for financial development. Originality/value - This paper is the first of its kind to empirically examine the causal relationship between financial deepening and poverty reduction in Zambia using modern econometrics techniques.

Interest Rate Reforms, Financial Deepening and Economic Growth in Kenya: An Empirical Investigation

This paper examines the impact of interest rate reforms on financial deepening and economic growth in Kenya, using two models: the financial deepening model and the dynamic Granger causality model. The study attempts to answer two critical questions: Does interest rate liberalization in Kenya have any positive influence on financial deepening? Does the financial depth which results from interest rate liberalization lead to economic growth? Using cointegration and error-correction models, the study finds strong support for the positive impact of interest rate liberalization on financial deepening in Kenya - although the strength and clarity of its efficacy is sensitive to the level of the dependency ratio. The study also finds financial depth to Granger cause economic growth in Kenya. The study, therefore, concludes that the interest rate liberalization in Kenya has succeeded in increasing economic growth through its influence on financial depth. This applies irrespective of whether the models are estimated in a static long-run formulation (cointegration model) or in the dynamic formulation (error-correction model).

Financial Deepening, Capital Inflows and Economic Gr owth Nexus in Tanzania: A Multivariate Model

Abstract In this study the dynamic causal relationship between financial deepening and economic growth is examined using a multivariate model. Unlike the majority of the previous studies, the current study includes foreign capital inflows as an intermittent variable between financial deepening and economic growth, thereby creating a simple trivariate model. Using the newly introduced ARDL-bounds testing procedure, the study finds a distinct unidirectional causal flow from economic growth to financial depth in Tanzania. This applies irrespective of whether the causality is estimated in the short run or in the long run. Other results show that there is a bi-directional causality between financial development and foreign capital inflows, and a prima-facie unidirectional causality from foreign capital inflows to economic growth. The study, therefore, concludes that financial development in Tanzania follows growth, irrespective of whether the causality is estimated in a static or dynamic formulation.

Financial systems and economic growth in South Africa: a dynamic complementarity test

This study examines the relationship between banks, stock markets and economic growth in South Africa. The study attempts to answer one critical question: are stock markets and banks complementary to one another in the process of enhancing economic growth? The complementarity between the stock markets and banks is examined by including a set of interactive terms in a standard growth model, alongside bank development and stock market development proxies. In order to test the robustness of the results, three proxies of stock market development have been used, namely stock market capitalization, stock market traded value and stock market turnover – against the ratio of bank credit to the private sector, a proxy for bank-based financial development. The economic growth is, however, proxied by real GDP per capita. Using the ARDL-Bounds testing procedure, the study finds that the complementarity between stock market development and bank-based financial development is weak and sensitive to the proxy used to measure stock market development.

Do banks and stock markets spur economic growth? Kenya's experience

This paper investigates the dynamic causal relationship between bank-based financial development, stock market development, and economic growth in Kenya - during the period from 1980 to 2012. In order to address the problem of omitted variable bias, the study includes savings and investment as control variables - thereby creating a multivariate Granger-causality model. The method of means-removed average is employed to construct a bank-based financial development index and a stock market development index. Using the newly developed ARDL-bounds testing approach, the empirical results of this study reveal that there is a distinct unidirectional Granger-causal flow from economic growth to bank-based financial development in Kenya. This causal flow applies irrespective of whether the causality is estimated in the short run or in the long run. The study, however, fails to find any causal relationship between market-based financial development and economic growth, and between bank-based financial development and market-based financial development in Kenya. The study, therefore, concludes that the development of the Kenyan banking sector is largely driven by the countrys real sector.

Financial liberalisation and economic growth in Nigeria: an ARDL-bounds testing approach

Employing the Autoregressive Distributed Lag (ARDL)-Bounds testing approach, and using GDP – excluding the contributions from oil and gas, as well as the financial services sector – as the growth indicator between 1969 and 2008, the paper establishes a long-run relationship between economic growth and financial liberalisation, which is represented by an index. This index is calculated by using Principal Component Analysis (PCA). The paper finds that financial liberalisation policies have a positive and significant effect on economic growth in Nigeria – both in the short run and in the long run. The study, therefore, recommends that appropriate financial liberalisation policies should be pursued in Nigeria, in order to foster economic growth. However, considering the fact that financial markets are prone to market failures, the study cautions against adopting a laissez-faire approach to financial reforms.

Stock market development and economic growth in Ghana: an ARDL-bounds testing approach

This article examines the relationship between stock market development and sustainable economic growth in Ghana. The study employs the recently developed ARDL-bounds testing approach and multidimensional stock market development proxies to examine this linkage. The article finds that in the long run, stock market developments and capital account liberalization policies have no positive effect on economic growth in Ghana. This finding supports the numerous past studies, which have reported negative or inconclusive results on the effects of stock market development on economic growth. The article, therefore, concludes that it is the increase in credit to the private sector, rather than stock market development that drives the real sector development in Ghana.

Foreign exchange markets and the purchasing power parity theory: Evidence from two Southern African countries

Purpose - The purpose of this paper is to examine the validity of the purchasing power parity (PPP) hypothesis for two Southern African countries, namely: Lesotho and Zambia. Design/methodology/approach - The authors utilized four econometric tests to examine the existence of the PPP hypothesis in Lesotho and Zambia. These tests include two unit root tests without structural breaks – the Dickey-Fuller generalized least squares (DF-GLS) test and the Ng-Perron test; and two unit root tests with structural breaks – the Perron test and the Zivot-Andrews test. The authors’ empirical analysis is based on an annual data set with varying time periods. The sample period spanned 1960-2010 and 1955-2010, for Lesotho and Zambia, respectively. Findings - The authors found that the PPP hypothesis was supported in the case of Lesotho, but rejected in the case of Zambia. Originality/value - This paper is the first to simultaneously explore the exchange rate policies, trends, and the PPP for these two countries. The implication of this finding is that Lesotho is unlikely to profit immensely from trade and investment arbitrages; whereas Zambia is more likely to profit immensely from trade and investment arbitrage by trading with the USA. Moreover, the authors’ findings indicate that the PPP doctrine may be a useful guide for the exchange rate and other macroeconomic adjustment policies in Lesotho but not in Zambia.

Interest rate reforms, financial deepening and economic growth in Tanzania: A dynamic linkage

In this paper we examine the dynamic relationship between interest rate reforms and economic growth in Tanzania using two tests. In the first test, we examine the impact of interest rate reforms on financial deepening using a financial deepening model. In the second test, we examine whether the financial deepening, which results from interest rate reforms, Granger‐causes economic growth – using a trivariate model. The empirical findings of our results reveal that there is a significant positive relationship between interest rate reforms and economic growth in Tanzania. However, the results fail to find any support for finance‐led growth.