Financial intermediation and economic growth in southern Africa

The role of the financial sector in stimulating economic growth has been debated in the economic profession for decades. The prevailing view is that financial intermediaries reduce the transactions costs of channeling funds from savers to entrepreneurs by reducing information asymmetries between lenders and borrowers, there by stimulating investment and growth. Inflation, on the other hand, increases uncertainty and has a negative impact on investment and reduces growth. This paper tests these two hypotheses empirically using a pooled time series for a cross-section of countries in the southern cone of Africa. The countries are members of the Southern African Development Community (SADC) integrated trade group. The empirical results suggest a positive correlation between the growth in the level of liquid liabilities ( as a proxy for financial depth) and economic growth, and also confirm the negative correlation between inflation and economic growth.