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Financial Deepening, Interest Rate Spread and Economic Growth: New Evidence from Sub-Sahara Africa

Mohamed Jalloh

,

Yao Guevera

Mohamed Jalloh 1

Yao Guevera 2

  1. Economic Policy Analysis Unit (EPAU), ECOWAS Commission, Abuja, Nigeria 1

  2. Community Development Programme (CDP), ECOWAS Commission, Nigeria 2

Pages: 52-64

DOI: 10.18488/journal.62.2017.43.52.64

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Article History:

Received: 22 March, 2017
Revised: 10 May, 2017
Accepted: 20 June, 2017
Published: 24 July, 2017


Abstract:

This study examines the nexus between financial deepening, interest rate spread and economic growth using data from Sub-Sahara African (SSA) countries. A dynamic panel approach is employed in estimating the parameters of the specified equation using the Sargan test of over-identification restriction in assessing the validity of the instruments used in addressing potential endogeneity problems of the data. The results show that whilst financial deepening positively drives growth, interest rate spread adversely affect growth in countries studied. In terms of relative effects, the results indicate that enhancing financial deepening by10.0 percent induces economic growth on average by a margin of 4.2 percentage points. On the contrary, however, raising interest rate spread by 10.0 percent reduces growth on average by a margin of 3.6 percentage points in countries studied. Based on these findings, there is a strong need for the implementation of policies that promote financial deepening. In particular, there is a strong need for financial authorities supervising the activities of commercial banks to ensure low interest rate spreads with a view to promoting the efficiency of banks in effectively playing their financial intermediation role to boost economic growth for poverty reduction in SSA countries.

Contribution/ Originality

Keywords:

Financial deepening, interest rate spread, growth, efficiency, intermediation, Sub-Sahara Africa

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Reference:

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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

Both authors contributed equally to the conception and design of the study.

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