Are Political Stability and Democracy Effective on Financial Development? Evidence from Sub-Saharan African Countries

Abstract

The interaction between institutional phenomena such as political stability and democracy and the financial system is an important issue that has been researched for many years. Political instability and acts of terrorism are some of the important problems faced by sub-Saharan African countries. For this reason, in this study, the effects of political stability and democracy on the financial system in Sub-Saharan African countries during the period from 2002 to 2019 are investigated. In the study, in which the Two-Stage System Generalized Moments Method estimator was used, the dependent variable is the financial institutions development index. The explanatory variables of the study are the indicators of political stability and democracy. The control variables are the growth in GDP per capita, trade openness, inflation rate, foreign direct investment, and urban population ratio. The analyses display that democracy and political stability have positive effects on financial development. In terms of control variables, while the inflation rate has a negative effect on financial development, economic growth and trade openness affect financial development positively. In light of the findings, it is recommended that policymakers in Sub-Saharan African countries make arrangements to ensure political stability and increase the level of democracy to ensure financial development.