Is Financial Development Heterogeneity Promoting or Retarding Sustainable Development in Africa?

Abstract

ABSTRACT This research examines the extent to which the growth and environmental dimensions of sustainable development are influenced by the diversity of financial development, encompassing the financial development index, the financial institution index, and the financial market index. The analysis covers a selection of 30 African countries from 1996 to 2021. The study contributes to the financial development‐sustainable development literature by evaluating the moderating influences of digitalization and regulatory quality alongside various control variables, including technological innovation, government spending, trade openness, renewable and nonrenewable energy sources, and foreign direct investment. Empirical evidence is derived using estimators such as the system generalized method of moments and the common correlated effects mean group approach for the short‐ and long‐term nexuses, respectively. The results of the research suggest that although financial development promotes sustainable economic growth, it incurs environmental costs. Nevertheless, when the beneficial impacts of digitalization and regulatory quality are taken into account, the negative consequences linked to growth‐focused financial development are mitigated. Elements such as technological innovation, renewable energy, and foreign direct investment not only stimulate growth but also contribute to reducing environmental harm. In contrast, factors that boost economic growth while compromising ecological integrity include trade openness, government spending, and nonrenewable energy. To address these conflicting priorities, the report provides policy suggestions.