Financial sector development and natural resource rents: the role of institutions in Sub-Saharan Africa

Institutions are important in analyzing the relationship between natural resource rents and financial sector development. The existing research has not unanimously established the role played by the quality of institutions on the impact of natural resource rents on financial sector development. The financial-resource nexus literature has largely ignored the role of institutions and the sensitivity of the relationship to the choice of proxies for financial sector development. This study provides new empirical evidence on the interactive role of institutions in the relationship between natural resource rents and financial sector development for 25 Sub-Saharan African countries from 1996 to 2017. To that end, we employ a dynamic system GMM estimator with endogeneity-purging efficiency. Our results show that a huge improvement in legal and political institutions is required to boost the impact of natural resource rents on Sub-Saharan Africa's financial sector development. Our results are robust to the use of alternative measures of institutions. We also found that the impact of natural resource rents on financial sector development is unclear as this depends on how financial sector development is measured. Implications of the findings for academics, policymakers and regulators are provided.