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The financial sector plays a vital role in fostering economic growth, regardless of a nation's development stage. However, East Africa, compared to other regions, faces unique challenges in advancing its financial landscape. While the existing body of research acknowledges the significance of financial development in promoting economic growth, some studies need more regional specificity, focusing on broader frameworks that may neglect specific factors like the quality of institutions within East Africa. This research addresses this gap by investigating the relationship between financial development and economic growth in 18 East African countries from 1995 to 2021. Employing dynamic panel estimation (GMM) to address potential Endogeneity and reverse causality concerns, the study delves into the moderating effect of institutional quality on this relationship. Factors like government stability, rule of law, presence of the military in politics, and corruption control measure institutional quality. Additionally, the study controls for other relevant factors influencing economic growth. Data sourced from reputable international organizations such as the World Bank, International Monetary Fund, and relevant risk assessment institutions serves as the basis for analysis. The findings reveal that the impact of financial development on economic growth in East Africa is multifaceted. While financial development itself demonstrates a positive influence on growth, this effect is significantly amplified in countries with stronger institutional frameworks. This suggests that robust institutions act as a catalyst, maximizing the positive impact of financial development on economic growth.
Xu et al. (Tue,) studied this question.