Current Institutional Determinants of Financial System Depth and Breadth in Africa: Similar or Different?

Chukwunonye O. Emenalo (Lagos Business School, Pan-Atlantic University)
Francesca Gagliardi (Hertfordshire Business School, U of Hertfordshire)
Geoffrey M. Hodgson (Hertfordshire Business School, U of Hertfordshire)

Abstract: Empirical studies have found positive effects of current institutional factors such as institutional enforcement quality and the quality of credit information infrastructure on financial system development (FSD). Studies on Africa, however, focus more on financial system depth (FSDT) measures of FSD and less on financial system breadth (FSB) measures. Moreover, the World Bank Doing Business Project recommends that improving the enforcing contracts, registering property, and resolving insolvency indicators may positively affect FSD. To our knowledge, however, there have not been empirical investigations into the link among these current institutional factors from the Doing Business Project and FSD within Africa. In addition, few studies on Africa have investigated the effects of within-country changes to these current institutional factors on FSD. Using a sample of 50 African countries and FSDT and FSB measures from 2004 to 2011, we find that few current institutional factors matter and these few that matter affect FSDT and FSB differently. Furthermore, we find that within-country changes to these current institutional factors have no statistically significant effect on FSD. The findings here support and qualify some claims of the law and finance theory and have implications for work on institutional reforms to increase FSD in regions with weak institutional structures.