The Determinants of Financial Development : A Focus on African Countries

Abstract: This thesis attempts to establish what determines financial development in Africa by making use of cross sectional and panel data techniques. Financial development, the dependent variable, is measured using the banking sector indicator liquid liabilities (M3) while trade openness, financial openness and the GDP growth rates are used as independent variables. The data used in this research ranges from 1975-200, though for the cross sectional analysis particular years (1975, 1985, 1995, and 2005) are focused on. The empirical results from both regression types generally suggest that trade openness has a significantly positive effect on Africa’s financial development. Cross-sectional results show that financial openness and the GDP growth rate are significantly negative in 2005. With the panel data results, financial openness is significantly negative in explaining financial development, while the GDP growth rate is insignificant suggesting that it is not an important determinant of financial development for African countries.