Do Openness and Democracy Deepen Banking Sector in Sub-Saharan Africa?

Abstract

This article examines whether openness and democracy deepen the banking sector in sub-Saharan Africa, using a sample of 33 countries over the period 1991–2015. After controlling for the potential effects of some country characteristics, this article shows that simultaneous opening of trade and capital borders and higher levels of democratic governance deepen the banking sector. It also shows that increasing financial openness without increasing trade openness would result in a shallower banking sector but increasing trade openness alone is adequate to deepen the banking sector. This article provides evidence to support the simultaneous openness hypothesis and political economy theory of financial development.