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Threshold effects of financial development and financial inflows on economic growth in sub-Saharan Africa countries

Author

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  • Soliu Bidemi Adegboyega

    (Olabisi Onabanjo University, Department of Economics)

  • Benjamin Ayodele Folorunso

    (Obafemi Awolowo University, Department of Economics)

  • Philips Oladele Olofin

    (Obafemi Awolowo University, Department of Economics)

  • Jimoh Sina Ogede

    (Olabisi Onabanjo University, Department of Economics)

  • Ibrahim Abidemi Odusanya

    (Olabisi Onabanjo University, Department of Economics)

  • Felix Odunayo Ajayi

    (Olabisi Onabanjo University, Department of Economics)

Abstract

Sub-Saharan Africa (SSA) has received substantial financial inflows over the past three decades, yet the region continues to experience inconsistent economic growth outcomes. The effectiveness of financial flows in driving economic growth may depend on reaching critical threshold levels, below which these flows may be ineffective or even counterproductive. Hence, this study investigates threshold effects of financial development and financial inflows (FDI, portfolio investment, and remittances) on economic growth in Sub-Saharan Africa, addressing the critical question of optimal absorption capacities for sustainable development. Using dynamic panel threshold technique on data from 15 SSA countries (1990–2022), the study endogenously identifies threshold levels while accounting for cross-sectional dependence and slope heterogeneity. The analysis covers both aggregate SSA and three sub-regional groupings. The study identifies distinct thresholds: 25% of GDP for FDI, 11% for remittances, and 9% for FPI. Below these thresholds, financial inflows exhibit mixed or negative growth effects, while positive impacts emerge above threshold levels. Sub-regional analysis reveals substantial variation in absorption capacities, with Southern Africa showing lowest thresholds (8% for financial development) compared to East/Central Africa (37%). The findings demonstrate the need for region-specific policies which are tailored towards building absorption capacities before pursuing aggressive financial liberalization. Policymakers should focus on institutional development and human capital formation to maximize benefits from financial inflows.

Suggested Citation

  • Soliu Bidemi Adegboyega & Benjamin Ayodele Folorunso & Philips Oladele Olofin & Jimoh Sina Ogede & Ibrahim Abidemi Odusanya & Felix Odunayo Ajayi, 2026. "Threshold effects of financial development and financial inflows on economic growth in sub-Saharan Africa countries," SN Business & Economics, Springer, vol. 6(1), pages 1-26, January.
    • Handle: RePEc:spr:snbeco:v:6:y:2026:i:1:d:10.1007_s43546-025-01010-7
    DOI: 10.1007/s43546-025-01010-7
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    JEL classification:

    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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