African Countries and Financial Development

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Enhancing financial development

Financial development is not a new concept and all countries do have financial systems. The problem however is that some of these systems do not function properly and to the best of their ability. Le-vine (2003) explains that financial development engrosses improvements in (i) production of ex ante information about possible investments, (ii) monitoring of investments and implementation of cor-porate governance, (iii) trading, diversification, and management of risk, (iv) mobilization and pool-ing of savings, and (v) exchange of goods and services. These functions are the five basic functions of financial intermediaries and though all financial systems provide them, the difference in how well the system provides these functions is great. A brief description of these aspects and the role they play are outlined below.

(i) production of ex ante information about possible investments

Costs linked with firm evaluations, managers and market conditions are generally large resulting in the inability of individual savers to collect, process and produce information on potential invest-ments. High information costs results in capital not flowing to its peak value. Financial intermediaries that economize the cost of acquiring information improve ex ante evaluation of investment pros-pects and can hasten economic growth, leading to more individuals affording to work with financial intermediaries and thereby benefit from their enhanced information.

(ii) monitoring of investments and implementation of corporate governance

The average problem of corporate governance is linked to how equity and debt holders sway manag-ers to put the interest of capital providers first. Lack of financial arrangements that augment corpo-rate governance could hold back savings mobilization and prevent capital from reaching gainful in-vestments (Stiglitz and Weiss, 1983). A number of researchers are of the view that financial markets will build up methods that can effectively enforce corporate control. This happens when diffuse shareholders exercise corporate governance through direct voting on important issues, for example mergers, liquidation and essential changes in business strategy. Shareholders indirectly supervise management through the selection of a board of directors that monitors managers, draws up mana-gerial incentive contracts and reviews decisions made by management.

(iii) trading, diversification, and management of risk,

With the existence of information and transaction costs, financial contracts, markets and intermedia-ries possibly will arise to relieve the trading, hedging and pooling of risk with repercussions for re-source allocation and growth. Using cross-sectional diversification of risks could alleviate risks con-nected with individual projects, firms, regions and countries. Intertemporal risk sharing involving long-lasting intermediaries can aid intergenerational risk sharing through investing with a long-run outlook and propose comparatively low return in boom periods and high returns in sagging periods. Liquidity risks occurring as a result of uncertainties linked with converting assets to a medium of ex-change can produce frictions that encourage the emergence of financial markets and institutions that enhance liquidity.

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(iv) mobilization and pooling of savings

Mobilizing savings, an expensive procedure of agglomerating funds from different savers for invest-ments, encompasses overcoming transaction costs linked to accumulating individual’s savings and in-formational asymmetries associated with individual’s trusting enough to hand over their savings. Fi-nancial systems that successfully pool savings of individuals deeply affect economic growth through capital accumulation, better resource allocation and increase technological innovation. The availabili-ty of credit increases and financial intermediaries aid investment in new technologies which increase productivity.

(v) exchange of goods and services

The financial sector aids transaction procedures by making obtainable the mechanisms to make and receive payments and reducing financial costs. So by providing financial intermediation in this way, the financial sector reduces transactions costs, and helps the trading of goods and services both in businesses and households. Financial arrangements that produce reduced transaction costs promote specialization, technology innovation and economic growth. Given this, encouraging exchange among markets leads to productivity gains which give feedback to financial market development. If African countries are able to implement means that improve these five functions they will stand a greater chance of benefiting more from financial development.

African Countries and Financial Development

The countries included in this study are countries on the African continent. The reason for focusing on African countries is to establish what determines financial development on this continent and what policies need to be implemented for these countries to benefit from financial development. Many countries on this continent are plagued by low, sometimes stagnant economic growth which in turn leads to difficulty in poverty eradication. Africa’s growth and poverty rate is one of the obstinate attributes of the global economy and Africa has for a long time been the poorest continent in the world.

1. INTRODUCTION.
1.1 Background
1.2 Purpose
1.3 Outline .
2. THEORETICAL FRAMEWORK
2.1 Financial development defined
2.2 Importance of financial development
2.3 Enhancing financial development
2.4 African Countries and Financial Development
2.5 Previous Studies
3. MODEL SPECIFICATION AND DATA
3.1 Cross-Sectional Data Specification
3.2 Panel Data Specification
3.3 Dat
4 EMPIRICAL RESULTS
4.1 Descriptive Statistics
4.2 Graphical Interpretation
4.3 Cross-sectional data results
4.4 Panel Data Regression
5 DISCUSSION
6. CONCLUSION
7. REFERENCES
APPENDIX