Interest rate liberalization and economic growth nexus: does corruption matter?
| DOI | https://doi.org/10.1108/JFC-02-2020-0029 |
| Published date | 02 May 2020 |
| Date | 02 May 2020 |
| Pages | 906-925 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Abdulhadi Aliyara Haruna,Abu Sufian Abu Bakar |
Interest rate liberalization and
economic growth nexus: does
corruption matter?
Abdulhadi Aliyara Haruna
Department of Economics, Universiti Utara Malaysia, Sintok, Malaysia, and
Abu Sufian Abu Bakar
School of Economics, Finance, and Banking, Universiti Utara Malaysia,
Sintok, Malaysia
Abstract
Purpose –This paper aims toexamine the impact of interest rate liberalization on economicgrowth and the
relevanceof corruption in the five selected sub-Saharan Africancountries.
Design/methodology/approach –The study used the modified version of Driscoll and Kraay’smodel
by Hoechle,which solved the effects of cross-sectional dependenceand heteroscedasticity.
Findings –The findings reveal a positive impact of the index on economicgrowth, and it was found that
foreign direct investment(FDI) and credit to private sector by banks (CPSB) all stimulate economicgrowth.
The interaction terms of corruptionwith FDI and CPSB indicate negative effects that show how corruption
erodes the benefitsof liberalization. Finally, the paper recommends the pursuitof appropriate policies with the
sole aim of eradicatingcorruption and providing a conducive environmentfor business.
Originality/value –The paper developed a composite domestic financial liberalization index to capture
the timing and essential dimensions of the reform process.The study investigates the effect of interest rate
liberalization on economicgrowth and the relevance of corruption. Most of the recent and past studiesonly
examinedthe impact of interest rate reforms on growth withoutinvestigating the relevance of corruption.
Keywords Interest rate liberalization, Economic growth, Corruption, Sub-Saharan Africa
Paper type Research paper
1. Introduction
Today the financial sector is considered a vital component in fostering economic growth.
The financial sector playsa crucial role in mobilizing savings and then channelingthe funds
to more productive investments, and hence promoting growth. The financial liberalization
literature is dominated by the impacts the financialsector plays on savings, investment and
economic growth. The deregulationof interest rate is the removal of government control, by
allowing the market forces to determine the rate of interest to be charged (Asongu, 2013).
The impact of interest rate liberalization is based on the theoretical works of McKinnon
(1973) and Shaw (1973); they maintained that liberalization of interest rate would lead to
increase saving, investmentand output growth. Liberalization of interest rates directs funds
toward more productive projects. The belief that by liberalizing interest rate, the deposit
interest rate would increase to encouragesavings, and with increased savings, more capital
would be available as credit to investors, which will enable the economy to grow faster.
Also, liberalization would increase the lending interest rate, which will make financial
institutions more willing to grand credit to investors because with increased lending rates,
banks will make more profit. Therefore,government policies that regulate interest rates at a
JFC
28,3
906
Journalof Financial Crime
Vol.28 No. 3, 2021
pp. 906-925
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2020-0029
The current issue and full text archive of this journal is available on Emerald Insight at:
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low artificial level could harm saving andinvestment, which serve as an essential factor in
determining long-term economic growth as back by economic growth models of Solow
(1956),Romer (1986) and Harrod (1948). However, scholars such as De Melo and Tybout
(1986) and Warman and Thirlwall (1994) believe that a rise in lending rates will also raise
the cost of borrowing, which will affect investment negatively and the increase in deposit
rates may not necessarily lead to increase in savings. Stiglitz (2000) pointed out that
economic fluctuations are usually worse because capital flows are naturally cyclical; this
makes financial liberalizationhighly related to instability. Financial market liberalizationis
closely related to financialcrises.
Sub-Saharan African countries have undertaken financial sector reforms, which involve
deregulation and the gradual opening of the sector to foreigninvestors. The countries have
liberalized interest ratesand exchange rates, eliminate direct credit control, privatized state-
owned banks and liberalized capital account. The 1980s financial sector reforms were a
reversal to financial repression policies, the steps, timing of each reform and extent of the
reforms varies across countries. Figure 1 shows the trends of financial liberalization index,
real gross domestic product per capita and foreign direct investment for each of the five
economies –Nigeria, SouthAfrica, Ghana, Kenya and Botswana –from 1980 t o 2018 –while
they implement the various dimensions of the liberalization over time, with no significant
and stable growth rate experiencedin the countries, with a continued declining growth rate
Figure 1.
Economic growth,
domestic financial
liberalizationindex
and foreign direct
investment
–20
0
20
–5
0
5
10
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
Nigeria
Index-Nigeria FDI RGDP
–5
0
5
–5
0
5
10
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
South Africa
Index-South Africa FDI RGDP
–20
–10
0
10
20
–5
0
5
10
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
Ghana
Index-Ghana FDI RGDP
–5
0
5
10
–4
–2
0
2
4
6
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
Kenya
Index-Kenya FDI RGDP
–20
–10
0
10
20
–5
0
5
10
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
Botswana
Index-Botswana FDI RGDP
Source: Authors’ computation based on World Development Indicators (WDI)
Interest rate
liberalization
907
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