The Nexus of Financial Development, Foreign Direct Investment, and Economic Growth in Selected Sub-Saharan African Countries

Abstract

This review examined the multi-faceted relationship between financial development, foreign direct investment (FDI) and economic growth for 22 countries within the Sub-Saharan Africa (SSA) region during the period 2007-2024. The study examines the contribution of financial institution access, efficiency and market depth, institutional quality and human capital development to financial development following the International Monetary Fund (IMF) multidimensional approach to financial development. The methodology is based on annual observations and reveals that the region is generally improving its financial development, with the economies of Namibia and Seychelles leading the way, but there are considerable differences between them and the global average with some countries doing poorer than the average. The descriptive statistics show that the real GDP growth rate has a large dispersion (mean growth rate of 4.04%) and a significant difference between countries with respect to banking infrastructure and credit market depth. The results suggest that financial development is useful in theory for its ability to lower transaction costs, channelize savings, and stimulate growth, but in practice is limited in its effect in SSA by low levels of financial development, high public debt, and institutional weaknesses. The study concludes that financial deepening should be accompanied by macro-fiscal stability and strong regulation to prevent speculative risks and to get the maximum growth benefits. The recommendations to the policy highlight the need to carry out the policy sequentially, digital financial inclusion with targeted focus and management of sovereign borrowing risks for a robust financial system to catalyze long-term economic gains from FDI and domestic credit.