Effect of the state of institutions on financial sector development in the Southern African Development Community region

Abstract

Background: The financial sector plays a pivotal role in enhancing sustainable economic growth and development. The study looks at how institutions influence financial sector development (FD) and stability.
Aim: The study investigates the effect of state institutions on FD in the Southern African Development Community (SADC) region. The investigation considers the impact of institutions alone and the moderating effects of capital inflows on FD.
Setting: The study uses a panel of 15 SADC countries for the sample period 2007–2021. One country (Comoros) was left out because of the unavailability of data. The region has diverse economic structures allowing for analysis of institutional quality indicators and their impact on FD.
Methods: In this study, a quantitative approach was used to analyse the data with the system Generalized Method of Moments (GMM) econometric technique. Panel Granger causality testing at country level was also carried out.
Results: The different indicators of institutions showed varied impacts on FD. Rule of law, control of corruption and the overall institutional quality proxy show a negative and weak impact on FD, whereas voice and accountability, political stability, regulatory quality and government effectiveness show a weak and positive impact on FD. However, when moderated with the capital inflows variable, the results portray improved significance and positive influences on FD.
Conclusion: An environment of strong institutions, together with capital inflows, is critical in the overall development of the financial sector. The SADC region’s openness to trade has harmed the local financial sectors to some extent. Hence, the need for tightening some restrictions on international trade policies.
Contribution: The study provides insights into the specific institutional quality measures that influence FD within the SADC region, considering the moderating effect of capital inflows. These results can be used by SADC countries and relevant government agencies in designing and implementing policies that strengthen institutional frameworks and promote FD.