Weak exogeneity test results

The relationship between bank development and economic growth can either be a demand- following or supply-leading one (Patrick, 1966), or a simultaneous vicious or virtuous cycle (Berthelemy & Varoudakis, 1996). However, given the conflicting views in respect of the causal link between financial development and economic growth, what prevails within a particular setting becomes an empirical issue.

The weak exogeneity results are reported in Tables 5.4-5.6, which report the Chi-square statistic and the probability value of the weak exogeneity test. Specifically, the causality results present three null hypotheses: (i) the two-way causality between economic growth and bank development (Y↔FD); (ii) causality running from economic growth to bank development (Y→FD); and (iii) causality running from bank development to economic growth (Y←FD). A “Yes” indicates that the null hypothesis could not be rejected, while a “No” accordingly indicates that the null hypothesis is rejected.

Table 5.4: Weak exogeneity test results between bank and economic growth

CV Obs K A Y PC Y↔PC Y→PC Y←PC

Egypt Imports 40 2 4 17.03[0.00] 0.20[0.66] No No Yes

OilRents 40 2 4 5.30[0.02] 1.40[0.24] No No Yes

NetTaxes 40 2 4 7.23[0.01] 1.66[0.20] No No Yes

Nigeria GasRents 40 2 4 1.11[0.29] 6.75[0.01] No Yes No

NetTaxes 27 5 3 3.51[0.06] 0.48[0.49] No No Yes

OilRents 38 4 3 4.90[0.03] 6.05[0.01] Yes Yes Yes

South Africa

Agric 39 3 4 4.91[0.03] 1.24[0.26] No No Yes

CPI 40 2 4 7.78[0.01] 3.04[0.08] Yes Yes Yes

DepositR 34 2 3 10.87[0.00] 0.66[0.42] No No Yes

GvtCons 39 3 2 3.60[0.06] 2.94[0.09] Yes Yes Yes

LendingR 39 3 4 6.17[0.01] 0.27[0.60] No No Yes

NetTaxes 38 4 4 0.18[0.67] 6.94[0.01] No Yes No

Notes: CV – Control Variables. Y – Economic growth. PC – bank development proxied by credit to the private sector by deposit money banks. Y↔PC implies bi-directional causality; Y→PC implies causality running from economic growth to bank development and Y←PC implies causality running from bank development to economic growth.

Source: Estimation by author

Table 5.5: Weak exogeneity test results- bank liquidity and economic growth

CV Obs K A Y LL Y↔LL Y→LL Y←LL

Egypt Agric 39 3 2 3.27[0.07] 3.93[0.05] Yes Yes Yes

Elec 37 3 4 2.71[0.10] 2.99[0.08] Yes Yes Yes

Exports 39 3 3 0.57[0.45] 6.54[0.01] No Yes No

Industr 39 3 2 0.24[0.62] 4.19[0.04] No Yes No

OPP 39 3 3 0.55[0.46] 8.85[0.00] No Yes No

PDensity 39 3 3 0.00[1.00] 8.58[0.00] No Yes No

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Spread 33 4 3 9.53[0.24] 0.38[0.54] No Yes No

UrbanPop 38 4 2 4.00[0.05] 0.01[0.92] No No Yes

Nigeria Agric 28 4 4 2.46[0.12] 4.82[0.03] No Yes No

CPI 40 2 2 0.74[0.39] 9.73[0.00] No Yes No GasRents 40 2 3 3.71[0.05] 7.33[0.01] No Yes No UrbanPop 0 0 0 2.42[0.12] 10.17[0.00] No Yes No South Africa Agric 39 3 2 0.57[0.45] 9.47[0.00] No Yes No DepositR 34 2 3 6.21[0.01] 0.12[0.73] No No Yes ER_end 38 4 3 0.20[0.65] 4.33[0.04] No Yes No GvtCons 39 3 2 0.78[0.38] 7.15[0.01] No Yes No Imports 37 5 4 5.93[0.01] 2.38[0.12] No No Yes

Industr 39 3 3 4.18[0.04] 5.31[0.02] Yes Yes Yes

LendingR 38 4 4 0.52[0.47] 15.40[0.00] No Yes No

NetTaxes 39 3 3 0.05[0.82] 5.54[0.02] No Yes No

Notes: CV – Control Variables. Y – Economic growth. LL – bank development proxied by deposits of deposit money banks. Y↔LL implies bi-directional causality; Y→LL implies causality running from economic growth to bank development and Y←LL implies causality running from bank development to economic growth.

Source: Estimation by author

Table 5.6: Weak exogeneity test results- bank intermediation and economic growth

CV Obs K A Y BI Y↔BI Y→BI Y←BI

Egypt DepositR 35 2 3 10.88[0.00] 1.75[0.19] No No Yes

Exports 40 2 2 11.53[0.00] 0.08[0.77] No No Yes

GasRents 40 2 2 6.62[0.01] 0.91[0.34] No No Yes

Tel 27 5 3 0.15[0.70] 5.42[0.02] No Yes No

Tel100 27 5 3 0.15[0.70] 7.11[0.01] No Yes No

Nigeria Exports 0 0 0 0.03[0.87] 4.42[0.04] No Yes No

LendingR 38 4 3 0.08[0.78] 8.67[0.00] No Yes No

Spread 37 5 4 0.78[0.38] 10.34[0.00] No Yes No

UrbanPop 40 2 4 5.13[0.02] 4.034[0.04] Yes Yes Yes

South Africa

DepositR 34 2 3 12.70[0.00] 4.17[0.04] Yes Yes Yes

ER_av 37 5 2 0.04[0.85] 14.70[0.00] No Yes No

LendingR 38 3 4 4.21[0.04] 3.05[0.08] Yes Yes Yes

NetTaxes 39 3 4 4.11[0.04] 0.04[0.85] No No No

Tel 34 4 4 5.10[0.02] 3.94[0.05] Yes Yes Yes

UrbanPop 39 3 2 6.11[0.01] 1.61[0.20] No No Yes

Notes: CV – Control Variables. Y – Economic growth. LL – bank development proxied by deposits of deposit money banks. Y↔LL implies bi-directional causality; Y→LL implies causality running from economic growth to bank development and Y←LL implies causality running from bank development to economic growth.

Source: Estimation by author

The weak exogeneity results in Table 5.4 show that causality between credit to the private sector and economic growth in all the three countries predominantly runs from banking development to economic growth. In Egypt, all the three models reported show that causality runs from bank development to economic growth. In Nigeria, the two models reported show that causality runs from both directions. Lastly, in South Africa, results in Table 5.4 show that five out of six models show causality running from bank development to economic growth, while three show causality running from economic growth to bank development. The weight

82 of the evidence presented in Table 5.4 shows that in all the three countries causality predominantly runs from bank development (measured by credit to the private sector) to economic growth.

When liquid liabilities is used as a measure of bank development, causality appears to be running predominantly from economic growth to bank development in all the three countries. In Egypt, eight of the nine models reported show that causality runs from economic growth to bank development. In Nigeria, evidence shows that all the three models reported in Table 5.5 show causality running from economic growth. Similarly, in South Africa, six of the eight models show that causality runs from economic growth to bank development, while only three show causality in the opposite direction.

This suggests that the relationship between liquid liabilities and economic growth is likely to be demand-following, wherein bank deposits grow in response to growth of the economy (Patrick, 1966). According to Demirgüç-Kunt and Klapper (2012), one of the barriers to opening a savings account in Africa is a lack of income, which can be proxied by GDP per capita. This suggests that the level of income within a particular country (GDP per capita) is likely to influence the amount of deposits mobilised by banks, and not the other way around (i.e. that deposits are likely to influence the level of income). Once the deposits are entrusted to the deposit money banks, they are transferred to the private sector as credit. However, the nature of this relationship will be further analysed in Tables 5.7-5.9 below.

Lastly, Table 5.6 presents the causality test results between bank intermediation and economic growth in Egypt, Nigeria and South Africa. The results are mixed both across and within the countries. For instance, in Egypt three of the five models reported show that causality runs from bank intermediation to economic growth, while in Nigeria all four of the models reported show that causality runs in the opposite direction, that is from economic growth to bank development. In South Africa, the results are mixed regarding the direction of causality. Four models on each side show causality running in opposite directions.

In the next section, we explore the exact nature of these relationships, that is the sign and economic significance of the coefficients of the long-run relationship between bank development and economic growth.

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