Does financial inclusion and financial openness matter for capital market development? Evidence from a panel ARDL-PMG approach

Purpose This study aims to examine the effect of financial inclusion (FI) and financial openness (FO) on the development of capital markets in Africa. Design/methodology/approach The study uses data from 34 countries over 18 years (2004–2021) and adopts the panel autoregressive distributed lag and pooled mean group approach, with economic growth, trade openness, government expenditure and institutional quality as control variables. Findings The analysis reveals that both FI and FO contribute to the long-term development of capital markets across all income levels within the sampled countries. The interaction between FI and FO enhances capital market development (CMD) over the long run. This finding indicates that FO particularly enhances the development of capital markets in economies with comparatively lower levels of FI. Practical implications The findings of this research underscore the importance for policymakers and professionals to adopt guidelines and regulations that promote FI and openness. Such measures can bolster the development of strong financial systems by improving access to the formal financial sector, and by contributing to the growth of capital markets. Originality/value The study is robust to the use of a multidimensional financial and CMD index. It is one of the pioneering studies that explore the relationship between FI and FO, and how this interaction influences CMD.