Effect Of Natural Resource On Financial Development In Africa: The Role Of Economic Freedom

Abstract

Despite the numerous financial sector alterations carried out in various economies over the past few decades, there is evidence that financial development in Africa remains low. The inability of resource abundance economies to expand their financial sector has been linked in a growing body of literature to natural resource windfalls. This is due to a poor degree of financial growth on the continent as a result of rising corruption and rentseeking brought on by the enormous resources found in Africa. Economic freedom has the ability to establish the economic conditions required to support improvement of the roles of financial market and institutions in an economy, and it is evident from research works that economic freedom is a significant element of financial development in resource rich countries. As a result, this study uses data from 1996 to 2018 and a technique called the "Generalized Method of Moment" to analyse the conditional impact of economic freedom on the effect of natural resources on financial development in African nations. The analysis employed the IMF's Financial Development Index, NRR, and a metrics of economic freedom from Heritage Foundation. The study's findings demonstrate how economic freedom transforms the adverse effect of natural resource into a benefit for the financial sectors of African nations. The report, thus, advises African countries with numerous resource deposit to formulate and implement rules and regulations that empower private individuals to own and control productive resources so as to exploit the windfall that accompany natural resource to support expansion financial sector.