Financial Integration and Financial Development in Africa

Faced with an ever-increasing financing gap, African economies need to find urgent solutions. With domestic capital markets underdeveloped, private investment is struggling to take off and fully play its role as a lever of economic growth. For some, the key could be greater financial integration, as this would revitalize the domestic financial system. Yet, some studies suggest that this effect is mainly observed in more advanced economies. This paper contributes to this debate by investigating the relation between financial development and financial integration using a sample of 39 African countries observed from 2000 to 2019. Dynamic panel estimation using GMM suggests that increased financial integration leads to higher financial development in Africa. This result can be attributed to the recent upward trend in financial development and financial integration observed in African countries. Expanding our empirical framework to include the spatial dimension, we observe that African countries are surrounded by neighbors with similar levels of financial development. Additionally, our spatial econometric modeling reveals that a country’s total assets held by deposit money banks, are positively influenced by those of its neighboring countries.