Predictors of Financial Development in Ghana

The paper explores the predictors of financial development in Ghana using data that span from 1971 to 2010. Evidence from the data supports the conclusion that interest rates and economic openness are long run significant predictors of financial development in Ghana whilst size of government is a short run significant predictor of financial development in Ghana. Economic growth, structural adjustment programme and democratic political system are not significant determinants of financial development. The results of the Granger causality tests in the error correction mode indicate a unidirectional causality running from economic openness and interest rate to financial development, meaning economic openness and interest rate drive financial development towards long run equilibrium. To the extent that rising interest rate as well as rising economic openness demonstrates a robust positive relationship with financial development, the paper contends that government intervention in the form of financial repression as well as trade restrictions should be avoided if the financial sector in Ghana is to develop. However, regarding economic openness, the paper cautions that the government must proceed with tact and circumspection so as to avoid the destabilizing effects of economic liberalization such as stock market volatility. [PUBLICATION ABSTRACT]