An application of frequency domain approach to the causal nexus between information, communication and technology infrastructure and financial development in selected countries in Africa

Abstract

Abstract Earlier studies on the causal relationship between information, communication and technology (ICT) and financial development have relied on a time domain approach, which does not distinguish among the various forms of causality at the different time periods. In this study, we re‐examine the causality nexus between ICT infrastructure and domestic level of financial development in 19 selected countries in Africa using a frequency domain spectral causality test technique that corrects the weaknesses eminent in the existing studies. Our findings suggest that, for most frequency levels, ICT infrastructure and domestic level of financial development in several countries are completely independent confirming the neutrality hypothesis. This holds irrespective of the measure of ICT and finance. We also find evidence to support the demand‐following hypothesis, supply leading hypothesis and feedback hypothesis at different time periods for the different countries under study. Given the findings, we argue that the causal relationship between ICT and financial development is not straightforward as suggested by the existing studies. In addition to indicator of ICT and finance, the extent to which countries' ICT infrastructure relates with their domestic financial sector development is contingent on whether the country is operating in the short, intermediate or long run.