Financial integration, capital market development and private sector access to finance in Botswana

Author: Kelesego Kelyh Mmolainyane

Mmolainyane, Kelesego Kelyh, 2015 Financial integration, capital market development and private sector access to finance in Botswana, Flinders University, Flinders Business School

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Abstract

ABSTRACT This thesis investigates financial integration in Botswana with a specific emphasis on its effect on economic growth, capital market development and financial access by the private sector. The study focuses on Botswana because of its democratic governance, which is unique among African nations. An overview of the local economy provides an understanding of institutional quality, development and the general structure of governance in Botswana. A review of the literature related to the thesis topic revealed that researchers have discussed the impact of financial integration on growth in different countries using various methodologies. This is the first study on Botswana to empirically test financial access and relate it to financial integration and other macroeconomic variables. There is previous scarcity of empirical evidence on the effects of financial integration on the local Botswana economy. This study therefore makes theoretical contributions to the literature. Conclusions and policy implications drawn from the study could be used to inform decision and policy-makers on issues related to financial integration. Based on neoclassical growth theory, the study applies an empirical methodology to analyse time series data from 1975 to 2011. Unit root tests, cointegration and causalities were conducted prior to investigating the equilibrium relationships based on vector error correction models (VECMs). Empirical analysis began with a standard neoclassical growth model, aimed at understanding the impact of several economic growth indicators. The study findings support the existing literature with some minor differences as a result of country-specific data and the methodology applied. The data indicates that investment, trade openness, human capital and economic freedom have a positive long-run influence on growth. Inflation, on the other hand, significantly and negatively influences economic growth. The impact of financial integration on growth was analysed using four indicators: aggregate stock of external asset and liabilities to GDP; stock of liabilities as a share of GDP; ratio of inflows and outflows of capital to GDP; and ratio of inflows of capital to GDP. A negative influence on growth by financial integration was observed but the investigation clearly shows that there seems to be no robust relationship between the indicators and growth. The impact of foreign direct investment on capital market development was then analysed after estimating interactions between capital market development and economic growth in Botswana. vi The findings reveal that both capital market development indicators (market capitalisation and market liquidity) have a significant positive impact on growth and market liquidity. Overall, it was observed that FDI flows have a positive impact on capital market development even though the impact is not significant. FDI flows may not have reached the threshold level necessary to affect movements on the Botswana stock market significantly. Furthermore, it is argued that the impact of financial integration on financial access to the private sector is based on the availability and accessibility of financial innovations. This analysis was done to in order to investigate both direct and indirect channels through which financial integration impacts growth in Botswana. The effects of financial integration on financial access are mixed, whilst financial innovations positively influence growth. An indirect influence of financial integration on growth through financial innovations was therefore established. Moreover, a dual positive impact exists between growth and financial development but financial integration negatively and significantly influences financial development in Botswana. Overall, this study supports previous research, arguing that financial developments drive economic growth. Botswana should continue to strengthen its trade openness policy, develop and empower institutions and promote the rule of law in order to reap more benefits from financial integration.

Keywords: Financial integration, Financial development, Financial innovation, Financial access, Botswana
Subject: Business thesis

Thesis type: Doctor of Philosophy
Completed: 2015
School: Flinders Business School
Supervisor: Associate Professor Abdullahi D. Ahmed