Keynes’ theory of liquidity preference and microfinance banks in Africa

Keynesian and Post Keynesian Economists have extensively discussed the theory of liquidity preference and the importance of obtaining loan funds from traditional banks. However, there is a distinct lack of theoretical and empirical evidence that demonstrates the effectiveness of Keynes’ Finance Motive in stimulating the demand for money and fostering economic growth within the realm of microfinance banks (MFBs) as vital financial institutions in developing countries. This paper endeavors to address the current research gap by examining a modified version of Keynes’ (1936) Finance Circuit, Keynes’ (1936) money demand and economic growth models that incorporates funds from MFBs. The present paper aims to further contribute to the literature through the empirical assessment of the significance of the above theoretical contributions using a sample of 32 African countries covering the time frame from 1990 to 2021. We utilize Granger causality tests in heterogeneous panels, as well as the Fixed Effect Ordinary Least Squares method, the Mean Group Method, and the Generalized Method of Moments. The empirical results confirm the significance of the inclusion of microfinance bank funds in the financial system which lower interest rates and enhance the demand for money and economic growth as illustrated in our theoretical contributions. The policy implications indicate that it is fundamental for regulatory authorities to involve microfinance banks in the financial system and to lower interest rates. This strategy is likely to enhance the demand for money and promote economic growth.