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What Really Drives Financial Sector Development in Ghana?

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Financial Sector Development in Ghana

Abstract

The chapter addresses two voids in the financial development scholarship on Ghana. First is the preferential selection of covariates deemed influential for financial development, and second, the use of traditional methods that lack regularisation powers for predicting financial development. To fill these gaps, we employ machine learning techniques to achieve two objectives—first, for identifying variables key for driving financial development in Ghana, and second, for presenting a model best for predicting financial development. To this end, we run three machine learning regularisation models namely, the Standard lasso, the Adaptive lasso and the minimum Schwarz Bayesian Information Criterion lasso, based on a dataset containing 81 potential predictors of financial development. We find that, for both regularisation and prediction objectives, the Adaptive lasso is the best. The evidence suggests that covariates such as economic globalisation, internet access and institutional quality matter for Ghana’s financial sector development. Policy recommendations are provided in the end.

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Notes

  1. 1.

    This can create instability in the financial sector as the sector become fragile and highly susceptible to crises.

  2. 2.

    The Global Financial Development index is multidimensional index providing estimates on the level of developments of a country’s financial institutions and markets.

  3. 3.

    In line with this agenda is the enumeration of five broad themes targeting: financial stability; access, quality and usage of financial services; financial infrastructure; financial consumer protection; and financial capacity (see, Government of Ghana, 2018).

  4. 4.

    Examples are DKM, God is love; MenzGold and Golden Life Microfinance Limited.

  5. 5.

    Examples are Hour Forever, BitDax and CriptonBit.

  6. 6.

    La Porta et al. (1998) argue that, common law countries provide stronger legal protection for investors than civil law countries.

  7. 7.

    Since the ordinary least squares technique and Ridge regression cannot yield variable selection, their estimations are relaxed.

  8. 8.

    48 covariates are specified as potential instruments.

  9. 9.

    Tightening the national identification and tax identification systems.

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Authors and Affiliations

  1. Department of Economics, University of Insubria, Varese, Italy

    Isaac Kwesi Ofori

  2. Department of Economic Studies, School of Economics, University of Cape Coast, Cape Coast, Ghana

    Camara Kwasi Obeng

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  1. Isaac Kwesi Ofori
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  2. Camara Kwasi Obeng
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Correspondence to Isaac Kwesi Ofori .

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Editors and Affiliations

  1. Department of Applied Economics, University of Cape Coast, Cape Coast, Ghana

    James Atta Peprah

  2. College of Law and Management Studies, University of KwaZulu-Natal, Pietermaritzburg, South Africa

    Evelyn Derera

  3. College of Law and Management Studies, University of KwaZulu-Natal, Durban, South Africa

    Harold Ngalawa

  4. Essex Business School, University of Essex, Colchester, UK

    Thankom Arun

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Ofori, I.K., Obeng, C.K. (2023). What Really Drives Financial Sector Development in Ghana?. In: Peprah, J.A., Derera, E., Ngalawa, H., Arun, T. (eds) Financial Sector Development in Ghana. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-09345-6_2

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  • DOI: https://doi.org/10.1007/978-3-031-09345-6_2

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