THE UNIVERSITY OF HULL Stock Markets, Financial Development and Economic Growth in Sub-Saharan Africa A Thesis submitted for the Degree of Doctor of Philosophy in Economics at the University of Hull By Seif R. Muba Bachelor of Accounting and Finance (Mzumbe University, Tanzania) MSc. BA-Finance, Banking & Insurance (VU University, the Netherlands) 23rd September 2016 DEDICATION To My lovely daughter Fadya Seif Muba i | P a g e ACKNOWLEDGEMENT First and foremost, I would like to thank the Almighty Allah (SWT) for His Continued Mercy and blessing that made it possible for me to complete this PhD project successfully. My heartfelt thanks goes to my sponsor, Mzumbe University for giving me this special opportunity to widen my knowledge in research. I would like to express my sincere gratitude to my supervisor Dr Raymond Swaray for the continuous guidance, advice, and support of my PhD study for his patience, inspiration, and immense knowledge. His tireless guidance motivated me in all the time of research and writing of this thesis. For sure, I could not have imagined having a better supervisor and advisor for my PhD project. I am enormously indebted to him, as I have learnt a lot from him; may the Almighty God bless him and his family. Besides my first supervisor, I would like to thank my second supervisor Dr Steve Trotter for his help and support during this PhD project. His insightful comments and encouragement have contributed a lot to this work. My sincere thanks also goes to Professor Andrew Abbott who provided me an opportunity to visit his office and having one to one discussions, which enthused me to widen my research skills from various perspectives. My sincere appreciation goes to my mother, Rehema Mohammed and of course, my late father, Ramadhani Muba who passed away 16 years ago but he always pushed me to work hard, may his soul rest in perfect peace, amen. I would also like to thank my sisters and brothers for their continued prayers and support. I would like to register my special appreciation and heartfelt gratitude to my dearest wife, Fatuma Juma for her tremendous support, sacrifice, and prayers. My special thanks also goes to my only daughter Fadya. Certainly, there was times that I missed you, but that pushed me forward and gave me strength to work even harder. I am also grateful to the Hull University Business School (HUBS) for the support and research facilities through which, this project was able to be conducted successfully. Without their precious support, it would not be possible to complete this project. Last but not the least; I would like to thank my colleagues; Dr G. Komba, J. Kiria, Dr C. Mbogela, and Dr A. Mwakibete, Dr L. Mbwilo, Dr R. Tweheyo, Dr B. Kisawike, and S. Mlekela, Fr. Kizito, Dr M. Alolo, Dr G. Nyamrunda and Mato Magobe. I thank you all for the stimulating discussions, for the sleepless nights we were working together before deadlines, and for all the fun we have had in the last five years. Many of you completed some months before me, I, therefore, used that situation as a motivation to wake up and work hard to attain the successful you have achieved. Here I am, thank you all. ii | P a g e TABLE OF CONTENTS DEDICATION .......................................................................................................................... i ACKNOWLEDGEMENT ...................................................................................................... ii LIST OF FIGURES ............................................................................................................... vii ABSTRACT ............................................................................................................................. x Chapter 1: Introduction ..................................................................................... 1 1.1 Overview of Financial Markets in Sub-Saharan Africa .............................................. 1 1.2 The Performance of Capital Markets in SSA ............................................................. 6 1.3 The Derivatives and Commodity Markets in SSA ..................................................... 8 1.4 The Foreign Exchange Markets in SSA .................................................................... 12 1.5 Objectives and Contributions of the Study ............................................................... 14 1.5.2 Objectives of the Study ........................................................................................... 14 1.5.3 Contributions of the Study ...................................................................................... 15 1.6 Organization of the Thesis ........................................................................................ 18 Appendix 1 .............................................................................................................................. 19 Chapter 2: Financial Development and Economic Growth Nexus in East African Countries: Evidence from the Regional Dataset ................. 20 2.1 Introduction ............................................................................................................... 20 2.1.1 Motivation for Studying East African Countries .................................................... 25 2.2 An Overview of Financial Sector Development in East African Countries ............. 27 2.2.1 Kenyan Financial Sector Development .................................................................. 28 2.2.2 Tanzanian Financial Sector Development .............................................................. 30 2.2.3 Ugandan Financial Sector Development ................................................................ 32 2.2.4 Burundi Financial Sector Development ................................................................. 35 2.2.5 Rwandan Financial Sector Development ............................................................... 37 2.3 Financial Development and Economic Growth ........................................................ 39 2.3.1 Theoretical Review ................................................................................................. 39 2.3.2 Empirical Review ................................................................................................... 41 2.4 Data and Data Sources .............................................................................................. 43 2.4.1 The Proxies for Financial Development ................................................................. 44 iii | P a g e 2.4.2 Additional Variables in the Model ......................................................................... 46 2.4.3 Measurement for Economic Growth ...................................................................... 48 2.5 Dynamic Panel Data Estimation Techniques ............................................................ 49 2.5.1 GMM System Approach ......................................................................................... 50 2.5.2 Panel Unit Root testing for selected Variables ....................................................... 52 2.5.2.1 Levin-Lin-Chu and Breitung Tests ......................................................................... 53 2.5.3 Panel Cointegration Testing ................................................................................... 54 2.5.4 Granger Causality Tests .......................................................................................... 54 2.6 Descriptive Summary Statistics of the Selected Variables ....................................... 55 2.7 Empirical Results ...................................................................................................... 57 2.7.1 Panel Unit Root Results .......................................................................................... 57 2.7.2 Panel Cointegration: Long-run Equilibrium Relationship Results ......................... 59 2.7.3 Panel Causality Results: Causal Relationship between Variables .......................... 62 2.7.4 Results from GMM System Approach ................................................................... 65 2.8 Discussion and Conclusion ....................................................................................... 68 Appendix 2 .............................................................................................................................. 73 Chapter 3: The Causal Effect of Sub-Sahara African Equity Markets on Economic Development: Empirical Evidence from Eleven Selected Countries ............................................................................................... 75 3.1 Introduction ............................................................................................................... 75 3.2 Sub-Sahara African Stock Markets: A Brief History ............................................... 80 3.3 Sub-Sahara African Stock Markets: Their Determinants Development & Trends ... 86 3.4 Theoretical Literature Review .................................................................................. 91 3.4.1 The Role of Stock Markets on Economic Growth ................................................. 91 3.4.2 Stock Market Liquidity and Economic Growth ..................................................... 96 3.5 Empirical Literature Review ..................................................................................... 98 3.5.1 Stock Market Development and Economic Growth: General Perspective ............. 98 3.5.2 Stock Market Development and Economic Growth in Sub-Saharan Africa ........ 102 3.6 Data and Data