Financial Development and Economic Development in Africa: Evidence from Panel Regression

This study investigated the effects of financial development proxied by domestic credit to the private sector (CR) and broad money supply as a percentage of GDP (BMS) on economic development across forty-three African countries for the period 2012 to 2025, with economic development measured by the Multidimensional Poverty Index (MPI). Secondary data were sourced from the World Development Indicators database of the World Bank and the United Nations Development Programme Human Development Reports. Panel data econometric methods were employed, specifically pooled ordinary least squares, cross-section fixed effects, and random effects estimations, with the Hausman specification test used to identify the consistent estimator. The Hausman test result (Chi-square = 20.03; p = 0.0027) confirmed the fixed effects model as the preferred specification. The model achieved an R-squared of 0.6626. Findings revealed that domestic credit to the private sector exerted no statistically significant effect on MPI (p = 0.8748), while broad money supply exerted a statistically significant positive effect (coeff. = 0.2866; p = 0.0012), indicating that monetary expansion was associated with higher rather than lower multidimensional poverty. The study concluded that financial development in Africa has not generated meaningful reductions in multidimensional poverty during the study period, largely because credit is concentrated among formal sector elites and monetary expansion has been inflationary rather than investment-led. The study recommended that African governments redirect credit flows toward productive and underserved populations through targeted guarantee schemes and priority sector lending frameworks, and that monetary authorities adopt inflation-disciplined policies supported by development finance institutions to channel liquidity toward poverty-reducing investments.

Financial Development, Broad Money Supply, Private Sector Credit, Multidimensional Poverty Index, Economic Development, Africa, Panel Data, Fixed Effects.

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