The Finance Growth Link: Comparative Analysis of Two Eastern African Countries

This paper examines the finance growth link of two low-income Sub-Saharan African economies – Ethiopia and Kenya – which have different financial systems but are located in the same region. Unlike previous studies, we account for the role of non-bank financial intermediaries and formally model the effect of structural breaks caused by policy and market-induced economic events. We used the Vector Autoregressive model (VAR), conducted impulse response analysis and examined variance decomposition. We find that neither the level of financial intermediary development nor the level of stock market development explains economic growth in Kenya. For Ethiopia, which has no stock market, intermediary development is found to be driven by economic growth. Three important inferences can be made from these findings. First, the often reported positive link between finance and growth might be caused by the aggregation of countries at different stages of economic growth and financial development. Second, country-specific economic situations and episodes are important in studying the relationship between financial development and economic growth. Third, there is the possibility that the econometric model employed to test the finance growth link plays a role in the empirical result, as we note that prior studies did not introduce control variables

Determinants of Migrants’ Savings in the Host Country: Empirical Evidence of Migrants living in South Africa

The paper uses a data set of Zimbabwean migrants living in South Africa to investigate the saving behaviour they exhibit in the host country. Having observed that these migrants comprise those that do save in the host country and those that do not save at all, the paper employs a Tobit function that is capable of modelling the savings level as function of migrant characteristics. The results observed are that the level of migrant savings in the host country is positively related to migrant income level, return migration intentions, number of dependents in the host country, remittance level and access to banking services, and is negatively related to the age of the migrant, number of dependents in the home country, migrant length of stay, migrant legal status, and frequency of home visits. Interestingly, the savings behaviour of migrants in the host country mirrors the remittance behaviour in many respects

Stock market liberalization and the cost of equity capital: An empirical study of JSE listed firms

Student Number : 0300191P - PhD thesis - School of Accountancy - Faculty of Commerce, Law and ManagementThe main objective of the study has been to provide new insights into ongoing recent studies examining the impact of stock market liberalization at both macro and micro (firm) levels. The study focused on a single country, South Africa, whose exchange, the Johannesburg Stock Exchange (JSE), liberalized in the 1990s. Consistent with empirical evidence from other studies the study finds support at market, firm and sectoral level for the prediction by international asset pricing models that stock market liberalization reduces the cost of capital. More important, the study makes five major contributions to the literature on the impact of stock market liberalization in emerging markets. First, it demonstrates that some emerging market specific risks such as political and economic risks can act stronger binding constraints to foreign investment than direct legal barriers which foreign investors are frequently able to circumvent. The second contribution is the observation that there are some firms (in the minority however) that will experience a significant increase in the cost of capital following liberalization, a situation where the local price of risk is higher than the global price of risk, contrary to international asset pricing theory. The third contribution is that it has been empirically proved that the reduction in firms’ cost of capital following stock market liberalization is permanent. It is not a transitory phenomenon. The fourth contribution of the study highlights the influence of firm specific characteristics such as size of the firm, book-to-market ratios and leverage ratios on firms’ response to impact of stock market liberalization. The preference for large firms by foreign investors is supported, contrary to Merton’s (1987) recognition hypothesis, and hence highlights the inconclusiveness of the debate on whether stock market liberalization benefits both large firms and small firms. The fifth contribution is the observation that the effective liberalization date is not the same for all firms but varies from firm to firm

Trends In Credit To Smallholder Farmers In South Africa

Access to credit for smallholder farmers remains a challenge in most developing countries. This paper examines the trend and pattern of bank credit to smallholder farmers in South Africa, both before and after the attainment of democratic government. The analysis of the trend and pattern of bank credit to smallholder farmers was conducted within the confines of the same agricultural sector, across all economy sectors and in relation to GDP. Our analyses show that bank credit to smallholder farmers is (and continues to be) a small fraction of total credit to the private sector and is a very small proportion of GDP. The smallholder farmer sector is observed to face the same constraints to credit as SMEs, a category of enterprises to which they also belong. In light of the importance of agriculture, in general, and smallholder farmers, in particular, to South Africa’s poverty alleviation and food security drive, our results have important policy implications

Bank Credit And Agricultural Output In South Africa: A Cobb-Douglas Empirical Analysis

We empirically examine the impact of bank credit on agricultural output in South Africa using the Cobb-Douglas production function. We utilize time series data of agricultural output, bank credit, capital accumulation, labour and rainfall from 1970 – 2009. With agricultural output as the dependent variable, we determine OLS estimates of the Cobb-Douglas production function. We observe that bank credit has a positive and significant impact on agricultural output in South Africa. With other factors of production kept constant, a 1% increase in credit results in 0.6% increase in agricultural output. Capital accumulation is also observed to have a positive and significant impact on agricultural output, albeit lower than that of credit, as a 1% increase in capital accumulation results in 0.4% increase in output, other factors kept constant. In terms the Cobb-Douglas elasticities, the combined effect of credit (0.6%) and capital accumulation (0.4%) gives constant returns to scale, meaning that doubling the two inputs will double agricultural output

Analysis of financial literacy and its effects on financial inclusion in Uganda

The paper investigates whether financial literacy influences financial inclusion in Uganda on the premise that there are currently few to no studies that investigate this causality and the general lack of consensus on an appropriate measure for financial literacy. It uses data from the FinScope (2018) consumer survey on Uganda and applies Principal Component Analysis (PCA) to construct a composite financial literacy index of the adult bankable population (16 years and older). The index is then regressed - alongside other demand-side control variables, against a measure of financial inclusion using logistic models. Our measure of financial literacy significantly and positively affects financial inclusion in Uganda even in the presence of variables like age, gender, income, and education. Individuals who make financial ends meet, plan for their financial future welfare, seek financial advice, and are receptive towards technology, are 'ceteris paribus', more likely to be financially included than not. Technology and mobile money adoption enhance financial inclusion while more men are financially included than women. While the dataset is limited to demand-side variables of Uganda and cannot be generalised, comparative cross-country studies with robust datasets are needed to provide further insights. The paper advances a novel approach for measuring financial literacy for developing economies while contributing to efforts to standardize an international measure. It also provides empirical insights to support the notion that financial literacy should be addressed more holistically and recommends this approach for improving financial inclusion in Uganda and globally

The Impact of Financial Sector Development on Foreign Direct Investment: An Empirical Study on Minimum Threshold Levels

Using panel data of 21 emerging economies, the paper investigates the financial sector development threshold levels that would influence foreign direct investment (FDI) inflows. The threshold levels we identified are 41.27% of stock market capitalization for stock market turnover, 53.55% of gross domestic product (GDP) for stock market value traded, 121.53% of GDP for stock market capitalization, 114.43% of GDP for domestic credit to private sector by banks, 144.06% of GDP for domestic credit provided by financial sector, 0.22% of GDP for outstanding domestic private debt securities and 41.26% of GDP for outstanding domestic public debt securities. Our results show that higher stock market and banking sector development above the threshold level positively and significantly influence FDI inflows whilst the influence of lower stock market and banking sector development on FDI inflows was weak and not significant. Levels of private bond market development equal to or greater than the threshold level are found to have a positive but non-significant impact on FDI inflows whilst private bond market development levels less than the threshold have a weaker positive and non-significant influence on FDI inflows. On the other hand, public bond market development levels equal to or greater than the threshold level negatively influenced FDI inflows whilst levels of public bond market development less than the threshold positively but non-significantly attracted FDI inflows into emerging markets. &nbsp

Bank Credit And Agricultural Output In South Africa: Cointegration, Short Run Dynamics And Causality

In this paper we investigate the dynamic relationship between bank credit and agricultural output in South Africa using time series data from 1970 to 2011. Using the Johansen cointegration test, we observe bank credit and agricultural output to be cointegrated. In the long run we find credit and capital formation to have significant positive impact on agricultural output. Employing an ECM, we find that, in the short run, bank credit has a negative impact on agricultural output reflecting the uncertainties of institutional credit in South Africa. However, the ECM coefficient shows that agricultural GDP rapidly adjusts to short term disturbances indicating that there is no room for tardiness in the agricultural sector.  The absence of institutional credit will be immediately replaced by availability of other credit facilities from non-institutional sources so that there is no room for possible non-application of intermediate inputs.  Conventional Granger causality tests show uni-directional causality from (1) bank credit to agricultural output growth; (2) agricultural output to capital formation; (3) agricultural output to labour; (4) capital formation to credit; (5) capital formation to labour, and a bi-directional causality between credit and labour. Noteworthy is that for the agricultural sector the direction of causality is from finance to growth, i.e., supply-leading, whereas at the macroeconomic level the direction of causality is from economic growth to finance, i.e., demand-leading.

Price Behaviour Of New Share Listings In Nigeria

The paper investigates whether new listings on the Nigerian Stock Exchange are under-priced or not. On aggregate, we find that investors are able to make abnormal gains from new listings on the first tier (main) market of the Nigerian Stock Exchange (NSE). Our analyses show that up to one year after listing the average differences of real share prices are positively significant to confirm the observation. The situation is however different in the second (emerging) tier market. Our analyses show that the real prices of newly listed shares in the second tier market do fall. Such an observation could, however, be attributed to thin trading of shares which phenomenon is characteristic of second tier markets. When we partition the data into pre-and post-deregulation periods, we observe under-pricing of new equity listings to have been severe during the pre-deregulation period, and hence more opportunity for abnormal gains. We find opportunities for making abnormal gains to be not as strong during the post-deregulation period. When the data is analysed on the basis of whether or not new listings are financial institution firms, some interesting patterns of price behaviour are found. While we observe possibilities of making abnormal gains in new listings of non-financial companies and insurance companies, these possibilities are absent in new listings of banking sector shares indicating that they are efficiently priced relative to those of other sectors

Financial Regulation And Supervision: Theory And Practice In South Africa

This paper discusses the theory of financial regulation and practices in countries and South Africa in particular. One of the causes of the global financial crisis (2007-2009) often cited is inadequate or improper regulation and supervision of the financial sector. The global financial crisis revealed inadequacies of extant regulatory systems which arguably had not kept pace with financial innovation. Consequently, all major economies are reforming their regulatory systems in the aftermath. In the UK the Financial Services Authority (FSA) has devised a set of banking regulation while the USA enacted the Dodd-Frank Act to revamp the regulation of financial services. Historically, financial regulation and supervision has been premised on the silo (institutional) approach whereby institutions are regulated according to functional lines. However, in the past two decades many countries in advanced economies adopted a consolidated approach in response to the emergence of financial conglomerates whose regulation could not be adequately handled by the traditional silo approach. South Africa, a middle-income developing country, has had a regulatory and supervisory system that has been driven by the market and international trends. Having started as a institutional approach, it metamorphosed into a functional approach in the late 1980s. Since the 1990s the South African regulatory and supervisory system has had at its heart the central bank regulating the banking sector and a multi-sector regulatory approach for other non-banking financial services. Though the financial sector was largely unscathed by the global financial crisis, South Africa has also moved to reform its regulatory system to embrace the “twin peak” model in line with trends in related countries