This study's focus is on the analysis of South Africa's finance-growth nexus. To contribute to the essential discussion that may prompt consideration of the financial sector reform agenda that fosters growth, this topic is being researched during this challenging economic period of slow real economic growth in South Africa, with 1.8% and 29.81% of GDP growth and unemployment rate, respectively in 2022. This study analyses the South African time series utilizing annual data from 1980 to 2018 to determine whether South Africa has a unique or distinctive finance-growth nexus. To capture the multidimensional phenomenon of financial systems, we employed the recently developed broad measure of financial development offered by the International Monetary Fund. We examined the long-run and short-run relationships between financial development and economic growth using the Autoregressive Distributed Lag (ARDL) technique which has many advantages over cointegration tests. Furthermore, this study reveals evidence of a mixed finance-growth casual association supporting the feedback hypothesis, sensitive to explanatory variables used as indicators of financial development, however, it does not find a relationship between financial development and economic growth in South Africa. Overall, we find that financial development and economic growth progress independently is particularly important for South African policymakers considering that the assertion by the companies that grow at levels that cannot be funded by internal funding is associated favourably with the development of the financial system and the securities markets. Therefore, we recommend that policymakers deploy strategies that shape the development of financial institutions and financial markets in a direction that affects firms’ access to external finance to directly contribute to economic growth. We recommend the formulation of policies that support both financial institutions-based development and financial markets-based financial development, such as policies that allow for increased retail participation in the financial market.

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Keywords

black economic empowerment; economic empowerment; BEE; B-BBEE; financial risk; risk