The Effects Foreign Capital Inflows on Financial Development of Sub-Saharan African (SSA) Countries

Abstract ―​

Finance is a major pillar that supports economic efforts in any society and serves as life wire that accelerates economic endeavors. As such financial development is a concern to most societies due to the important role it plays, yet, SSA financial system remains weak as compared to their counterpart. This study therefore sought to investigate the effects of foreign capital inflows on financial development of Sub-Saharan African countries. In order to achieve our objectives, we adopted a panel research design using panel data collected from IMF financial access data, 2021, Global Financial Development (GFD) data, 2021, World Bank Development Indicators (WDI) of 2021, for the 43 selected countries of SSA. Due to issues of cross sectional heterogeneity and dependence, we employ the two-step system GMM estimation technique which accounts for cross sectional heterogeneity and dependence which cannot be taken care of by other estimation techniques. For robustness check, the two stage least square analytical technique was adopted. There was high degree of robustness of the results. The findings indicate that FDI and FPI have negative effects on financial development whereas remittances have a positive effect on financial development. When financial development is disaggregated, remittances flow is set to have a significant positive effect on financial development in financial institutions whereas foreign direct investment and portfolio investment are said to have a negative and significant effect on financial development in financial markets. The study recommends that African governments should take a practical measure through the promotion of trade and investments among SSA States whereby financial structures within will benefit diversity of activities. We also urge SSA nations to encourage citizens abroad willing to repatriate income back home through desire tax system favourable enough to permit them remit their income through formal financial structures that will enhance financial development.