The effects of foreign banks presence on financial development in Africa; the role of institutional quality.
Description
The aim of the paper is to examine the moderation role of institutional quality on foreign bank presence and financial development nexus in 28 African countries for the period of 19 years spanning from 2000 to 2018. However, data on foreign bank presence span from 2000 to 2015. Data showed that while foreign bank presence induces financial development, the quality of institutions is also able to magnify the positive effect further. Data used for the study was sourced from World Bank (World Development Indicators (WDI), World Governance Indicators (WGI), Global Financial Database (GFD)), Human Development Report Office (HDRO), Bank Scope (BS), and International Monetary Fund (IMF). For instance, financial development is sourced from IMF whereas foreign bank presence measured with a share of foreign bank assets as a percentage of total universal banks' assets is sourced from BS. Inflaton, the consumer price index was used as a proxy for inflation and was used to capture the macroeconomic (in) stability of a country and was collected from WDI. Net trade which is the vector of export and import as a ratio of GDP and was obtained from WDI. Boone Indicator is a measure of the level of competition sourced from GFD. The study used the six available measures of institutional quality to create a composite index for institutional quality to capture the various dimensions of the institutions. These six variables include the estimate of; control of corruption, voice and accountability, rule of law, political stability and absence of violence, government effectiveness, and regulatory quality. The data on these variables were collected from the WGI of the World Bank. The study used Gross Domestic Product per Capita (GDPC) and sourced from WDI. The study used real exchange rate as a proxy for exchange rate and data was collected from WDI. The financial development Index, which is a measure has a mean of 0.1434. The minimum value for financial development is 0.0505 whereas the maximum value is 0.5028. This means that on average the financial system of the African sample for the study period is less developed. Also, the data shows that the African sample has more domestic banks than foreign banks on average. This is because foreign bank presence has a mean of 0.4468, implying that foreign banks hold 45% of the total asset of the sample. The competition among banks which is measured with the Bonne indicator has a mean of -0.0375. On average trade openness which is measured as net trade (%GDP) has a mean of 65.37 with a maximum value of 152.5471 and a minimum value of 1.295. The real GDP per capita that measures the income level of the citizens has a mean of 2.423 with the least value of -62.39 and the highest value of 121.78. By implication, there is the existence of inequality among the African sample size. The study conducted a sensitivity analysis, using both private credit and stock market capitalization both sourced from WDI.
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Steps to reproduce
First, we downloaded the data, arrange and code it for analysis. Then we run the descriptive and pairwise correlation matrix. After that, we run our dynamic panel regression using a two-stage system Generalised Method of Moment. We used STATA 16 in producing our results.