The response of banking sector development to financial and trade openness in the presence of global financial crisis in Africa

Abstract

Africa’s financial system is strongly bank-based and so this paper investigate  whether economic growth, financial openness and trade openness contribute to the development of the banking sector in the presence and absence of global financial crisis. The results from PMG/ARDL suggest that banking sector develops  independently of economic growth in lower-middle and high income countries while it develops as demand for finance increases in low and uppermiddle income countries in Africa. Being cautious of global financial crisis, trade openness is found to be more effective in high and lower-middle income countries, financial openness is more effective in low income countries and neither is more effective in upper-middle income countries. It is also discovered that, in the long run, global financial crisis generally reduce banking sector development in Africa but not in high income countries however the banking sectors of lower-middle and low income countries suffer the most from such crisis.

Keywords: Financial Openness, Trade Openness, Banking Sector Development, Global Financial Crisis, Africa, Income group