The relationship between banking sector and stock market development in selected Southern African countries : A panel data approach (1995-2017)

The study investigated the relationship between banking sector development and stock market development in Southern Africa, with special focus on the Southern Africa Development Community (SADC). Using the Seemingly Unrelated Regression (SUR) and System Generalised Methods of Moments (SGMM) on data from nine SADC countries, study results show that banks and stock markets complement each other in funding economic growth in the region. The results also show that regional integration through the trade protocol (TP) and the finance and investment protocol (FIP) improves the complementary effect of banks and stock markets on economic growth. The growth model outlined shows that stepping up efforts to promote regional integration improves the complementarity between the expansion of the banking industry and the growth of the stock market in terms of financing economic growth. The study also looked at how institutional settings affected how the banking industry and stock market development interacted. The findings demonstrate that the rule of law does not change the nature of the relationship, but it does lessen the complimentary impact of stock market and banking sector expansion on economic growth. The study used the banking sector development and stock market development models to test the validity of the findings and determine whether the association holds. Therefore, the study further investigated the determinants of banking sector and stock market development where stock market and banking sector indicators were included as regressors. Stock market development was found to have a positive impact on banking sector development while stock market capitalisation positively impacted credit extended by deposit money banks. This result confirmed the complementary relationship shown by the growth model. Urbanisation had a positive effect on banking sector development, private credit extension and banking sector efficiency but it negatively impacted banking sector stability. Population density had a positive impact on private credit extension and banking sector stability while inequality positively influenced banking sector development and banking sector stability. The results also reveal that banking sector development positively influences stock market development and stock market capitalisation while private credit by deposit money banks enhanced stock market development, stock market size, stock market liquidity and stock market efficiency. This conclusion also supported the notion that the growth of the banking sector and the stock market, as well as the size of the stock market and the credit extended by banks, all contribute to the development of the stock market in terms of its size, liquidity and efficiency. This result showed that banking sector development contributed more to the development of stock markets compared to the effect of stock markets on banks. Press freedom was found to positively affect stock market size and stock market liquidity. Industrialisation on the other hand had a negative effect on stock market size while capital flight negatively impacted stock market development, stock market size and stock market liquidity. The study also uncovered the positive effect of pegged exchange rate regime on stock market development and stock market capitalisation while the crawling and managed regimes positively influenced stock market size. On the contrary, the floating regime had a detrimental effect on stock market development and stock market capitalisation. The findings also show that the banking sector in SADC is still underdeveloped characterised by low credit extension and high inefficiency though it is stable. Stock markets were also found to be underdeveloped characterised by small size, low liquidity and low levels of efficiency. These findings suggest that the rise of the banking industry and the stock market complement one another in providing capital for economic expansion, and that regional integration strengthens this complementary relationship. The rule of law, however, lessens this complimentary effect. To improve the complementarity between the growth of the banking sector and the growth of the stock market in providing financing for economic growth, policymakers should concentrate on fostering regional integration and enhancing the rule of law. The expansion of the banking sector has been found to have a higher positive impact on stock market development than vice versa. Therefore, they should focus their efforts on improving loan extension and efficiency in this area.Finance, Risk Management and Bankin