Governance, Financial Liberalization, and Financial Development in Sub-Sahara Africa

John Karikari, US Government Accountability Office

An analysis of the roles of governance and financial liberalization in the financial development of Sub-Saharan Africa (SSA) countries yields several interesting results. First, financial liberalization did not have an independent impact on financial development contrary to previous studies, probably due to lack of significant changes in financial openness since the 1990s. On the other hand, good governance has had an independent impact on financial development since 2002, and the origin of legal systems suggests that civil laws are less favorable to financial development than common laws. Second, there is a strong interaction between financial liberalization and governance, especially in the 2000s. From 1996 to 2002, surprisingly, the impact of financial liberalization was reduced with good governance that reduced political instability and corruption. But, since 2002 good governance related to the credibility of the government and the rule of law increased the impact of financial liberalization on financial development.