Threshold effect of financial development on sectoral efficiency in Africa

Abstract

Purpose This paper aims to examine the threshold effect of financial development on sectoral efficiency using 42 African countries from 2000 to 2020. Design/methodology/approach The paper used the panel threshold regression estimation. To measure financial development, the paper used domestic credit to private sector and bank deposits to GDP. Findings The findings showed that the effect of financial development on sectoral efficiency depends on the measure of financial development. Domestic credit and bank deposits have a positive linear effect on the efficiency of the manufacturing sector. Domestic credit has a U-shaped relationship with agriculture technical efficiency, but its relationship with the service sector is inverted U-shaped. This study makes some significant contributions. Bank deposits drive efficiency but beyond a certain level, the effect is not significant. Practical implications It is recommended that domestic credit to the private sector beyond 8.0976% is good for agriculture technical efficiency, while domestic credit below 11.1906% is needed for service sector efficiency. Also, threshold values below 25.9713% and 14.8981% are recommended to see a significant positive effect of bank deposits on efficiency (agriculture and service sectors, respectively). Originality/value To the best of the authors’ knowledge, this paper is the first to consider the threshold effect of financial development on sectoral efficiency.