Regional Financial Integration in Sub-Saharan Africa - An Empirical Examination of its Effects on Financial Market Development

Abstract

This paper examines the effects of political agreements on regional financial integration (RFI) on financial market development and access to and cost of finance in Sub-Saharan Africa. Our results suggest that RFI positively affects financial development - measured very broadly as the size of the financial sector, including the liabilities of the central banks - when combined with a sufficient level of institutional quality. If institutional quality is below a threshold level, RFI apparently has negative effects on financial development. However, we can find no significant effects of RFI on the size of the private financial sector or on the efficiency of the banking sector. Regarding the effects of RFI on access to and costs of finance of enterprises in SSA, our results are mixed. We can find no significant effect of RFI on access to finance for all firms in the aggregate, but the results indicate that RFI actually impedes small firms' access to finance. Furthermore, there is a significant positive influence of foreign bank involvement on the severity of the credit constraint for small enterprises, while we don't find such an influence for large enterprises. These results provide some support for the foreign bank barrier hypothesis in the context of RFI.