Financial inclusion, institutional quality, and capital market development: evidence from Africa

Abstract

This paper examines the development of capital markets in the African context, incorporating financial inclusion and institutional quality. The study utilizes a unique data set for the period between 2004 and 2021 for countries in the African region. Our findings, based on the PMG-Panel ARDL approach, indicate that while financial inclusion and institutional quality significantly promote capital market development in the long run, their effect is not statistically significant in the short run. Conversely, the interaction between financial inclusion and institutional quality has a significant negative effect on capital markets in the long run. These findings underscore the centrality of financial inclusion and institutional quality in capital market development. Similarly, the study suggests that poorquality institutions result in an exclusive financial sector, thus adversely affecting the development of capital markets. The study recommends that policymakers and researchers consider the importance of quality institutions as they seek to strengthen their financial sectors.