The heterogeneous effects of macroeconomic and financial factors on financial deepening in Africa: evidence from a method of moments quantile regression analysis

Abstract

Purpose This paper aims to investigate the heterogeneous effects of macroeconomic and financial factors across various distributions of financial deepening in 22 African countries over the past two decades (2000–2019). Design/methodology/approach The paper uses a recent method of moments quantile regression, which accounts for the often overlooked heterogeneity effects. The analysis focuses on the banking sector, which is predominant in Africa, using a broad range of macroeconomic and financial indicators. Findings The findings show that gross domestic product per capita positively and significantly impacts financing deepening with an increasing marginal benefit as depth increases. Trade openness positively and substantially affects only high financial deepening. Real interest rate, real exchange rate and inflations negatively and significantly affect financial deepening, especially at higher than lower levels. Financial stability positively and substantially influences financial deepening with an increasing marginal benefit as the depth increases. Bank lending interest rate, bank lending–deposit rate spread, bank concentration and return on equity negatively and substantially impact higher levels of financial deepening than lower levels. Practical implications These findings are crucial to policymakers and development partners, as promoting a favourable financial environment and stable macroeconomic policies based on the heterogeneity of financial depths can increase debt financing in Africa. Originality/value To the best of the authors’ knowledge, this paper is one of the first attempts to analyse the heterogeneous effects of macroeconomic and financial determinants on varying levels of financial depth in Africa.