This study empirically evaluates spatial externalities in financial development
in the Southern African Development Community (SADC) in line with
spatial proximity theory. The study specifically tests whether financially less
developed economies in SADC benefit from their linkages with and proximity
to South Africa, a financially developed economy. GMM and Dynamic Fixed
Effect estimations established that financial development in the SADC is not
immune to spatial externalities. Results indicate that monetary measures are
more sensitive to geography than credit. Allowing for spatiality, credit from
South Africa displays strong positive spatiality under Dynamic Fixed Effects
but no effect under GMM, possibly responding to crowding-out, South Africa’s
global linkages and natural flow of credit towards optimal returns. Implicitly,
the spatial variable has a strong complementary effect in the money market and
a relatively inconsistent complementary effect in the credit market. Estimations
that controlled for effects of monetary union in the model also confirm that
financial development is affected by spatiality in the money market and is less
responsive to spatial effects in credit. The current level of trade and financial
openness in SADC is not enough to facilitate financial development in other
subsectors of the financial sector, beyond money.

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Keywords

Spatial Externalities,Spatiality,Financial Development,SADC