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Interest‐Rate Reforms and Financial Deepening in Botswana: An Empirical Investigation

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  • Nicholas M. Odhiambo
  • Oludele A. Akinboade

Abstract

In this paper, we examine the impact of interest‐rate reforms on financial deepening in Botswana, one of Africa's economic development success stories. We employ three proxies of financial deepening against deposit rate, a proxy for interest‐rate reforms. The financial deepening in this study is defined as the increase in the relative size and role of the financial system in an economy. The empirical results of our study show that the impact of interest‐rate reforms on financial deepening is sensitive to the variable used as a proxy for financial deepening. When the ratio of bank deposits to GDP (BD/GDP) is used as a proxy for financial deepening, the interest‐rate reforms impact positively on the level of financial deepening. However, when the monetization variable (M2/GDP) and the ratio of the private sector credit to GDP (DCP/GDP) are used, the coefficient of the deposit rate in the financial deepening model turns out to be statistically insignificant. Overall, our results show that the positive impact of interest‐rate reforms on financial deepening in Botswana is minimal. This outcome, though contrary to our expectations, is not surprising given the high level of population dependency in Botswana. Our results show that there is a strong negative relationship between the dependency ratio and financial deepening in Botswana.

Suggested Citation

  • Nicholas M. Odhiambo & Oludele A. Akinboade, 2009. "Interest‐Rate Reforms and Financial Deepening in Botswana: An Empirical Investigation," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 38(1‐2), pages 97-116, February.
    • Handle: RePEc:bla:ecnote:v:38:y:2009:i:1-2:p:97-116
    DOI: 10.1111/j.1468-0300.2009.00211.x
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    References listed on IDEAS

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    4. Abdullahi Dahir Ahmed, 2006. "The Impact of Financial Liberalization Policies: The Case of Botswana," Journal of African Development, African Finance and Economic Association (AFEA), vol. 8(1), pages 13-38.
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    Cited by:

    1. Hao Chen & Duncan O. Hongo & Max William Ssali & Maurice Simiyu Nyaranga & Consolata Wairimu Nderitu, 2020. "The Asymmetric Influence of Financial Development on Economic Growth in Kenya: Evidence From NARDL," SAGE Open, , vol. 10(1), pages 21582440198, February.
    2. Moyo, Clement & Le Roux, Pierre, 2018. "Interest rate reforms and economic growth: the savings and investment channel," MPRA Paper 85297, University Library of Munich, Germany.
    3. Alton Best & Brian M. Francis & C. Justin Robinson, 2017. "Financial Deepening and Economic Growth in Jamaica," Global Business Review, International Management Institute, vol. 18(1), pages 1-18, February.
    4. Tomola Marshal Obamuyi & J. Adeniyi Demehin, 2012. "Interest Rate Reforms And Financial Deepening In Nigeria," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(2), pages 81-90.

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