The Effect of financial literacy on national economic growth in Sub-Saharan Africa

Abstract

This study examines the relationship between financial literacy and economic growth in Sub-Saharan Africa. The overarching objective of this study is to investigate whether financial literacy has a positive effect on economic growth with the existence of reverse causality. Using data from the 2021 Global Findex database, a financial literacy index is created to evaluate individual engagement in financial activities related to savings, borrowing, and financial planning. An instrumental variable regression was conducted to test the hypothesis of reverse causality in the relationship between financial literacy and economic growth. The results of this model confirmed that financial literacy is exogenous to GDP per capita, nullifying the possibility of reverse causality. Subsequently, a multiple linear regression is conducted to test the hypothesis that financial literacy has a positive effect on economic growth. The results indicated a statistically insignificant positive effect of financial literacy on GDP, suggesting that, while financial literacy may have a positive impact on economic growth, it lacks substantial predictive power in this particular model. This study recommends that future research focuses on standardizing financial literacy metrics and exploring long-term effects across broader temporal data for robust insights.