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International Journal of Energy Economics and Policy | Vol 11 • Issue 1 • 2021
318
International Journal of Energy Economics and
Policy
ISSN: 2146-4553
available at http: www.econjournals.com
International Journal of Energy Economics and Policy, 2021, 11(1), 318-325.
Finance and Renewable Energy Development Nexus: Evidence
from Sub-Saharan Africa
Jaison Chireshe*
A-One Business Services, Zimbabwe. *Email: jaisonchireshe@yahoo.com
Received: 15 July 2020 Accepted: 17 October 2020 DOI: https://doi.org/10.32479/ijeep.10427
ABSTRACT
Renewable energy technologies provide an opportunity for sub-Saharan Africa countries to reduce energy poverty, achieve energy security and economic
growth. This paper examined the relationship between nancial development and renewable energy development using data from 17 selected sub-Saharan
Africa countries for a 17-year period from 2000 to 2016. The study sought to understand whether nancial development is associated with increased
renewable energy generation capacity. The investigation adopted a xed effects and system generalised methods of moments estimation approaches
to understand the relationship between nancial development and renewable energy development. The results show that nancial development is
positively correlated with renewable energy production capacity. These results imply that policy makers in sub-Sahara Africa must foster nancial
development in their respective countries to ensure increased investment in renewable energy production capacity.
Keywords: Financial Development, Renewable Energy Development, Sub Saharan Africa
JEL Classications: G21, G42, O1
1. INTRODUCTION
Energy contributes to both economic growth and social
development, directly and indirectly (Kraft and Kraft, 1978;
Belke et al., 2010). The contribution comes through increasing the
productivity of capital, labour and other factors of production as
well as improving quality of life through healthcare and education
(Solarin, 2011). Adequate and reliable energy supply is required to
transform input materials into both tangible and intangible outputs
(Stern and Cleveland, 2004). The absence of reliable energy supply
constrains economic growth and social development as in the case
of sub-Saharan Africa (SSA). The SSA region produces the least
amount of energy in the world and the supply is often erratic. In
addition, the region has the highest level of energy poverty. In
2017, 55 per cent of households in SSA lacked access to electricity
and this gure rises to over 83 percent in rural areas (WDI, 2020).
SSA is the only region in the world where the number of people
with no access to electricity is increasing (IEA, 2014). The energy
decit continues to increase despite that SSA has a large and varied
resource pool to produce surplus energy for current and future
consumption (IEA, 2018).
In addition to high levels of energy poverty, the region relies
heavily on non-renewable energy sources. Over 70 percent of
Africa’s energy comes from fossil fuels such as coal, oil and
gas IEA (2018). At household level, reliance on unclean energy
for cooking and lighting is associated with respiratory diseases
(Agenor and Moreno-Dodson, 2006). According to WHO (2016)
about seven percent of diseases worldwide are caused by indoor air
pollution from wood smoke, resulting in an estimated 1.6 million
premature deaths each year. The SSA region accounts for about
38 percent of these deaths.
The low energy production and correspondingly high energy
poverty levels in the region are attributed to a huge investment
gap in the energy sector. Finance remains a major hindrance
to investment in SSA’s vast renewable energy resource base
(Karekezi and Kithyoma, 2003). According Kaminker and
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Chireshe: Finance and Renewable Energy Development Nexus: Evidence from Sub-Saharan Africa
International Journal of Energy Economics and Policy | Vol 11 • Issue 1 • 2021 319
Stewart (2012) renewable energy projects just like any other
infrastructure project suffers from lack of investor capability and
understanding of the risks specic to infrastructure investing.
There is also a shortage of suitable investment vehicles particularly
collective debt instruments with suitable scale, satisfactory rating
and liquidity. The lack of investment is more pronounced in the
renewable electricity sub-sector hence the reliance on fossil fuels.
This calls for increased investment to boost power output from
renewable sources.
SSA have prime opportunities for renewable energy production
which can be harnessed to eliminate power shortages, bring
electricity and development opportunities to rural villages
that have never enjoyed those benets, spur industrial growth,
create entrepreneurs, and support increased prosperity across
the continent (Future Energy Africa, 2018). Renewable energy
technology also facilitates a cost-effective transformation to a
cleaner and more secure energy sector. Despite the recognition
that renewable energy sub-sector is an important source of
energy for SSA, the sector has attracted neither the requisite
level of investment nor tangible policy commitment (Karekezi
and Kithyoma, 2003).
This paper argues that renewable energy development requires well
developed nancial systems which can mobilise both domestic
and foreign nancial resources for investment in the sector.
According to the nance-industry growth nexus literature (Rajan
and Zingales, 1998, 2003; Beck et al., 2004; 2007; 2008) which
has its roots in Bagehot (1873) and Schumpeter (1911), nancial
development facilitates easy entry of new rms and spur growth
of existing rms. Industries and rms that rely heavily on external
nancing grow disproportionately faster in countries with well-
developed banks than in countries with poorly developed nancial
systems (Rajan and Zingales, 1998).
Well-developed nancial institutions accelerate capital ow to
sectors with high growth potential and investment prospects
(Fisman and Love, 2013). The renewable energy sector is one such
area in the SSA which presents potential growth and investment.
Renewable energy will make up almost half of SSA’s power
generation growth by 2040, (IEA, 2014). Globally, renewable
energy constitutes more than half of all global energy capacity
additions since 2012 (Gielen et al., 2019) revealing the huge
growth potential that the sector has.
As alluded earlier, investment in the renewable energy sector is
hindered by among other things by poor or non-existent sovereign
creditworthiness, under-developed financial markets which
do not offer enough capital and proper nancial instruments,
information asymmetry, high start-up costs and high economic
risk of infrastructure projects (Ba et al., 2010; Brunnschweiler,
2010). However, well developed nancial systems can overcome
these challenges through pooling of savings, amelioration of
risk, information sharing among other functions (Levine, 1997).
By performing these functions well developed nancial systems
overcome moral hazard and adverse selection problems thereby
promoting investment and growth of the renewable energy sector
(Kim and Park, 2015).
The study is motivated by two important factors. Investment
in renewable energy production technologies provide a vital
opportunity to reduce energy poverty in SSA, boost economic
growth and ensure energy security. Renewable energy production
enables countries to move away from reliance on fossil fuel to clean
energy sources reducing greenhouse gas emissions (Panwar et al.,
2011). Secondly, the role of nancial development on renewable
energy development in SSA is conspicuously absent. Globally,
existing studies literature linking nancial development and the
energy sector are focused on energy consumption. The literature
on nance and renewable energy development is very limited
despite the fundamental role played by nancial development in
the renewable energy sector (Brunnschweiler, 2010; Scholtens and
Veldhuisa, 2015). The few existing empirical studies have a limited
focus on SSA. Empirical studies on the determinants of renewable
energy development in SSA are not only limited but they also neglect
the role of the nancial development (e.g. Lokonon and Salami,
2017; da Silva et al., 2018). The existing literature on renewable
energy in SSA have been engrossed in discussing the potential of
renewable energy and barriers to investment (Odero, 2014).
The remainder of the paper is organised as follows; section 2
presents a review of both theoretical and empirical literature,
section 3 discusses the methodology, section 4 presents results and
discussion and the section 5 provides a conclusion to the study.
2. LITERATURE OVERVIEW
2.1. Theoretical Review
There are several schools of thought in the finance growth
literature and the prominent theories include the nance-led growth
(Schumpeter, 1911; Patrick, 1966; McKinnon, 1973; Shaw, 1973)
and growth-led nance hypothesis (Robinson, 1952, Lewis, 1956).
In addition to these two schools of thought, other scholars perceive
that the role of nancial development in economic activities is
overemphasised (Lucas, 1988, de Gregorio and Guidotti, 1995;
Arcand et al., 2015) whilst others view nance as destructive to
the process of economic growth (Minsky, 1974; Tobin, 1984;
Cihak et al., 2012).
The nance-led growth school of thought argues that the nancial
system by performing its functions it leads to investment,
technological innovation and subsequently economic growth. The
functions performed by the nancial system include mobilisation
and pooling of savings, allocation of resources, amelioration of
risk, exertion of corporate control as well as easing of trading
of goods services and contracts (Levine, 1997). Despite a well-
developed literature on this school of thought, there are dissenting
voices regarding the role of nancial development in investment,
economic growth and human welfare. The growth-led nance
(demand following) hypothesis argues that nancial development
follows economic growth or where enterprise leads nance follows
(Robinson, 1952). Growth in economic activities increase the
demand for nancial instruments and arrangements leading to the
growth of the nancial sector as it responds to growing demand.
In the disruptive school of thought, nancial development is
considered to disrupt the process of economic growth as nancial
Chireshe: Finance and Renewable Energy Development Nexus: Evidence from Sub-Saharan Africa
International Journal of Energy Economics and Policy | Vol 11 • Issue 1 • 2021
320
deepening could cause macroeconomic instability, distorting
society’s savings, leading to inefciency in bank lending (Minsky,
1974, Cihak et al., 2012). In addition to causing inefciency in
bank lending, overly sophisticated nancial instruments lead to
nancial fragility which can lead to economic meltdown (Rajan,
2005; Gennaioli et al., 2012). Empirical studies have shown
contraction of growth in the aftermath of banking crises and in the
presence of ‘too much nance’ (Arcand et al., 2015; Reinhart and
Reinhart, 2015). Tobin (1984) indicates that the nancial sector
attracts resources away from the real sector leading to inefciency
and impediment of the process of economic growth. A recent study
by Dabla-Norris and Narapong (2013) similarly argues that, before
the 2008 global nancial crisis, resources in advanced economies
were being diverted toward the nancial sector away from more
productive sectors.
Other scholars view nance as a neutral factor in the process of
economic growth, with Lucas (1988) arguing that the role of nance
in economic growth has been overemphasised. Arguments by de
Gregorio and Guidotti (1995), Cecchetti and Kharroubi (2015) and
Arcand et al. (2015) suggest that nancial development does not
always lead to economic growth. de Gregorio and Guidotti (1995)
suggest that high-income countries may have reached the point at
which nancial depth no longer contributes to increasing the efciency
of investment and ultimately to economic growth. Similarly, Arcand
et al. (2015) argue that when nance reaches a certain threshold its
positive effects on economic growth may disappear.
This study follows the nance-led growth school of thought. The
recognition of the role of nance in energy development stems
from the works of Churchill and Saunders (1989), Babbar and
Schuster (1998) and Head (2000). These researchers suggested
several innovative nancing options to improve performance and
investment in the energy sector especially by the private sector.
Kim and Park (2015) echoes the same sentiments by arguing
that the nancial sector by mobilising savings, ameliorating risk,
exerting corporate control and allocating resources it leads to
renewable energy sector growth.
2.2. Empirical Literature Review
A pioneering empirical study linking nancial development and
the energy sector by Sadorsky (2010) was followed by a series of
studies exploring the relationship between nancial development
and energy consumption in different jurisdictions and using
different methodologies (e.g. Chitioui, 2012; Çoban and Topcu,
2013; Ali et al., 2015, Roubaud and Shahbaz, 2018). The evidence
from these studies is mixed as some studies have showed a
positive relationship between nancial development and energy
consumption whilst another set have shown a negative relationship.
Another strand of literature focused on nancial development and
carbon emissions (Zhang, 2011; Abbasi and Riaz, 2016). These
two strands of literature posit that nancial development leads to
economic growth and household income hence increased energy
consumption and carbon emissions. However, as alluded earlier
the evidence from studies based on this hypothesis is inconclusive.
Scholars have also studied the determinants of investment in
renewable energy. Studies by Brunnschweiler (2010), Scholtens
and Veldhuisa (2015) and Kim and Park (2015) found that nancial
development has a signicant positive effect on renewable energy
investment and output. These studies are discussed below one after
the other. Brunnschweiler (2010) studied the impact of nancial
development on renewable energy output using panel data for 119
non-OECD countries from 1980-2006. The study used a general
methods of moments (GMM) approach. It showed that nancial
development has positive and signicant impact on the amount
of renewable energy output. The impact was greatest on non-
hydropower sources like geothermal, wind, solar and biomass.
Similarly, Fangmin and Jun (2010) examined the relationship
between nancial systems and renewable energy using panel
data from 1980 to 2008 for 55 countries. The study showed a
positive correlation between the development level of nancial
intermediation and the total power output of the renewable energy
projects in these countries.
In a similar study, Kim and Park (2015) studied the role of nancial
development in energy output using panel data from 30 countries
selected from the Americas, Asia and Oceania and Europe for a
14 year period ranging from 2000 to 2013. The results showed
that nancial development has a positive and signicant impact
of renewable energy output. Countries with well-developed
financial systems experienced a disproportionate growth in
renewable energy output as compared to countries with poorly
developed nancial systems. Scholtens and Veldhuisa (2015) also
studied the impact of nancial development and energy sector
development using data from panel of 198 countries from 1980-
2008. The study employed random and xed effects as well as
GMM estimation approaches. The results showed that nancial
development as measured by the size of the commercial banking
sector, commercial bank credit to the private sector and the size of
the nancial industry has a positive impact of renewable energy
capacity.
In summary, the empirical literature on nancial development
and renewable energy sector growth is still in its infancy with
the majority of the evidence emanating from case studies and
anecdotes (Fangmin and Jun, 2010). Secondly, the bulk of the
existing literature linking the nance sector and the energy sector
focuses on nancial development and energy consumption. Thirdly,
all the strands of literature linking nancial development and the
energy sector have a limited focus on SSA. Studies focusing on
the determinants of renewable energy in SSA exclude nancial
development in their analysis. With the quest to decarbonise the
world by switching from fossil fuels to sustainable energy sources,
it is important that the role of nancial development in renewable
energy is examined. The study therefore seeks to contribute to the
literature on nancial development and renewable energy sector
growth by focusing on SSA.
3. MATERIALS AND METHODS
3.1. Empirical Model and Estimation Techniques
To achieve the study objectives, Equation (1) was estimated using
real gross domestic product (GDP) per capita, energy consumption,
foreign direct investment and energy imports as explanatory
variables. All the variables used were transformed by taking their
Chireshe: Finance and Renewable Energy Development Nexus: Evidence from Sub-Saharan Africa
International Journal of Energy Economics and Policy | Vol 11 • Issue 1 • 2021 321
logarithms to normalize the data and linearise the relationships
among the variables. The empirical model is specied as follows;
lnRE=α0+β1 lnFD+β2 lnGDPcapita+β3 lnImports
+β4 lnFDI+β5 lnCons+vt (1)
Where, RE measures the installed generation capacity of renewable
energy; GDP_capita is the real gross domestic product per capita;
Cons is the demand for energy as proxied by energy consumption
per year; Imports represents energy imports; FDI represents
foreign direct investment; FD represents nancial development.
The data on renewable energy was sourced from the EIA databases
and data nancial development was obtained from the International
Monetary Finance (IMF) data. The remaining data on real GDP
per capita, FDI, was sourced from World Development Indicators.
3.2. Measurement of Variables
3.2.1. Renewable energy development (non hydro capacity)
This variable measure the level of renewable energy development
in country. The variable was proxied by the amount of renewable
electricity production capacity installed. The renewable energy
variable excludes hydropower installed capacity. Inclusion of
hydropower distorts the renewable energy development levels
as governments have been actively financing investment in
hydropower for a long time and has matured as an energy source
(REN21, 2015).
3.2.2. Financial development (ndex, accesindex and
depthindex)
The variable measures the level of nancial development in a
country. The variable was proxied by three composite indices
namely the nancial development, nancial institutions depth and
access indices. Svirydzenka (2016) for details on the construction
of these indices. The use of composite indices aims to circumvent
the pitfalls that comes with using a single dimension index like
private sector credit to GDP or automated teller machines (ATMS)
per 100,000 people. The nancial development index measures
the overall development of the nancial sector of a country. It’s a
multidimensional index measuring depth, access efciency and
efciency of the nancial sector. The index is made up of the
banking sector, insurance sector and capital market variables. The
nancial institutions depth index is made up of private-sector credit
to GDP, pension fund assets to GDP, mutual fund assets to GDP
and insurance premiums (life and non-life) to GDP. Deep nancial
systems are efcient and allocate funds to their most productive
uses (World Bank, 2008). They also offer savings, payments,
and risk-management products to as large a set of participants as
possible and seeking out and nancing good growth opportunities
wherever they may be (Beck et al., 2008). The nancial institutions
access index is made of number of commercial bank branches
per 100 000 people and number of automated teller machines
(ATMs) per 100 000 people. According to the IMF (2008), access
to nance can expand opportunities for those with higher levels of
access. Additionally, the use of banking services is associated with
lower nancing obstacles for both people and businesses. Access
to nancial services by the SSA population is both relatively and
absolutely limited. Lack of access to nance is a key constraint on
the growth of small and medium enterprises in SSA (IFC, 2013a).
Financial development variables are expected to be positively
correlated for renewable energy production variables.
3.2.3. Real GDP per capita
This a proxy measure of a country’s level of income per capita.
The variable is expected to be positively correlated with renewable
capacity. Countries with higher income levels are expected to
investment in renewable energy resources.
3.2.4. Foreign direct investment (FDI)
The variable measures the net inow of foreign direct investment
in a country. FDI increases renewable energy installed capacity.
FDI is also a vehicle for technology transfer from developed to
less developed countries (Findlay, 1978; Blalock and Gertler,
2008). The variable is expected to be positively correlated with
renewable installed capacity.
3.2.5. Consumption
The variable measures the amount of energy consumed in a country
per year from both renewable and non-renewable sources. The
consumption variable is a proxy measure of the demand for power
in a country. The variable is expected to be positively correlated
to renewable installed capacity.
3.2.6. Imports
The variable measures the amount of electricity imported by a
country in a year. Reliance on imported energy has a negative
effect on investment in the local energy generation capacity. This
variable is expected to be negatively correlated with renewable
electricity installed capacity.
4. RESULTS AND DISCUSSION
4.1. Descriptive Statistics and Diagnostic Tests
The summary statistics show that an average of 16.29 billion
kilowatts hours (KwH) of electricity were consumed over the study
period whilst 765,000 KwH of renewable energy capacity were
installed. The average real GDP per capita stood at US$1,860.
Table 1 for details.
The variables and estimation methods were subjected to a series of
tests to ensure that the results were not misleading. The tests carried
out included unit root, heteroskedasticity and autocorrelation
and tests that relate to the choice of estimation methods and
instrumental variables. The study tested the stationarity of all
the variables used in the analysis to avoid running spurious
regressions. The Fisher-type Phillips-Perroni test was used to
determine the stationarity of the data series. The tests showed that
all the variables are stationary in levels. Table A1 in the Annex
for detailed results.
4.2. Fixed Effects Estimation
Equation 1 was estimated using the xed effects estimation
approach as guided by the results of the Hausman test. The xed
effects estimation approach captures countries-specic effects
that inuence the level of renewable energy production capacity.
but are not observable. The results of the xed effects estimation
approach show that financial development is positively and
Chireshe: Finance and Renewable Energy Development Nexus: Evidence from Sub-Saharan Africa
International Journal of Energy Economics and Policy | Vol 11 • Issue 1 • 2021
322
signicantly correlated with renewable energy generation capacity.
A one percent increase in the overall nancial development index,
nancial sector depth index and nancial access index is associated
with a 3 percent, 2.1 percent and 1.7 percent increase renewable
energy installed capacity respectively. The results conrmed the
study hypothesis which postulated that well-developed nancial
systems foster the development of the renewable energy sector.
Table 2 presents the complete results of the analysis.
The results also show that electricity consumption is positively
correlated renewable energy installed capacity whilst electricity
imports is negatively correlated renewable energy installed capacity.
4.3. Generalised Method of Moments Estimation
(GMM)
In addition to using the xed effects estimation approach, the
study used the system generalised methods of moments (Blundell
and Bond, 1988) to deal with potential endogeneity with the
nancial development variables. The GMM approach facilitates
the extraction of the exogenous component of the financial
development variables (Aguirregabiria, 2009; Alonso-Borrego,
2010). A two-step system GMM approach which is robust to
heteroskedasticity was used. A correction for down biasedness of
standard errors was also done (Windmeijer, 2005). Following Beck
et al. (2008), the study averaged the data over non-overlapping
3-year periods to end up with seven observations per country.
The results of the regressions analysis were tested for second
order serial correlation (AR2) using the Arellano and Bond test
(Arellano and Bond, 1991). The null hypothesis on the presence of
serial correlation was reject in all regressions. The Sargan test of
overidentication also showed that all the instruments used were
valid. The system GMM regression analysis conrmed the results
of the xed effects analysis and the study’s priori expectation. The
results showed that a one percent increase in the overall nancial
sector development (Findex) leads to a 4.5 percent increase in
renewable energy generation capacity. Similarly, a one percent
increase in the nancial sector depth and access indices leads
to a 3.9 percent and 1.6 percent increase in renewable energy
generation capacity respectively. Table 3 shows the results of the
system GMM regression analysis.
The results from the xed effects and system GMM regression
analysis are in tandem with the broad nance-industry growth
nexus in which nancial development facilitates easy entry of
new rms, spur growth of existing rms and increase productivity
(Rajan and Zingales, 1998). Additionally, the above ndings
are like those from previous studies on renewable energy and
nance by Brunnschweiler (2010), Fangmin and Jun (2010)
as well as Kim and Park (2015). These studies also found that
nancial development had a signicant impact on renewable
energy capacity.
The overall nancial development variable had the largest effect on
renewable energy production capacity when compared to nancial
depth and access variables. This shows that the different sub-sectors
of the nancial sector play synergic roles in fostering investment in
the renewable sector. Governments in SSA must formulate policies
that foster holistic growth of their respective nancial sectors as
opposed to piece meal approaches. Focusing of the sub-sector
indices the results show that, the nancial depth has a stronger
positive association with renewable energy capacity as compared
to nancial access. The variation can be explained by the crucial
roles played by deep nancial systems. Deep nancial systems
enhance access to nance and help industries and rms most reliant
on external nancial resources as well as by allowing smaller rms
to overcome nancing constraints and grow faster (Beck, 2006).
4.4. Control Variables
In all the six regressions, energy consumption is positively and
signicantly correlated with renewable energy production capacity.
Energy consumption represents the demand for energy and as such
Table 1: Descriptive statistics
Variables Observations Mean Standard. deviation Minimum Maximum
Consumption (billion Kwh) 289 16.29 47.61 0.123 220.4
FinIndex 289 0.166 0.136 0.024 0.618
Depth index 289 0.177 0.246 0.004 0.895
FDI (US$ billion) 287 4.157 6.012 –4.844 50.02
Access index 289 0.09 0.11 0.003 0.459
GDP_capita (US$) 289 1.860 2.300 193.9 9,834
Imports (million kw) 289 1.262 2.990 0.00 13.06
Non hydro capacity (million kw) 289 0.0765 0.302 0.00 3.784
Table 2: Financial development and renewable energy: A
xed effects estimation approach
Independent variables Non-hydro capacity
Model 1 Model 2 Model 3
logFindex 3.05***
(0.35)
- -
logDepthIndex - 2.11***
(0.20)
-
logAccesindex - - 1.67***
(0.30)
logConsumption 1.029***
(0.058)
1.07**
(0.06)
1.82***
(0.08)
logGDP_capita –1.515***
(0.1)
–1.88***
(0.07)
–2.79**
(0.31)
logImports –0.613***
(0.06)
–0.51**
(0.04)
–0.57***
(0.09)
logFDI 0.00143
(0.07)
–0.04
(0.02)
–0.54***
(0.16)
Constant 10.25***
(1.12)
11.3***
(0.78)
16.0***
(2.6)
R-squared 0.75 0.74 0.61
Number of countries 17 17 17
Number of observation 158 158 158
Hausman test 41.4 (0.00) 25.0
(0.00)
23.6 (0.00)
Standard errors in parentheses ***P<0.01, **P<0.05, *P<0.1
Chireshe: Finance and Renewable Energy Development Nexus: Evidence from Sub-Saharan Africa
International Journal of Energy Economics and Policy | Vol 11 • Issue 1 • 2021 323
increased demand stimulates renewable and non-renewable energy
production. The results are in line with the priori expectation. The
study also shows that imports are negatively and signicantly
correlated with renewable production capacity in line with the
priori expectation. Importing energy acts as a disincentive for
countries to investment in renewable energy.
However, the results of GDP per capita and FDI contradicted
the priori expectation as these two variables were negatively
and signicantly correlated with installed capacity of renewable
energy. FDI in the renewable energy sector in SSA is largely
constrained by lack of conducive energy policies, price distortions
and lack of infrastructure (Karekezi and Kithyoma, 2003).
5. CONCLUSION
Renewable energy technology provides an opportunity for SSA
countries to reduce energy poverty, achieve energy security and
economic growth. Financial development plays a vital role in
mobilising resources and efcient allocation of capital among other
functions which foster investment in the renewable energy sector.
The existing literature on nance and energy is largely focused
on nancial development and energy consumption. There is also
limited research on the link between nancial development and
renewable energy in SSA.
The study explored the relationship between nancial development
and renewable development in selected SSA countries. It used data
from 17 selected SSA countries for a 17 year period from 2000
to 2016. Renewable energy development was measured by the
amount renewable generation capacity installed in a country. The
study used xed effects and system GMM estimation approaches.
The results showed that financial development is positively
and signicantly correlated with renewable energy production
capacity. The results also showed that energy consumption is
positively and signicantly correlated to installed renewable
energy production capacity. Energy imports were found to be
negatively and signicantly correlated with renewable energy
capacity. Importing energy acts as a disincentive for countries to
investment in renewable energy generation capacity.
In terms of policy implications, the study showed that SSA
countries must foster the development of their respective nancial
sector to mobilise both domestic and offshore nancial resources
for investment in the local renewable energy sector. Strengthening
the regulation, deregulation of the nancial sectors and reducing
government ownership of banks are policy instruments that can
spur the development of the local nancial sector. Government
must also reduce reliance on energy imports to enable the
development of the renewable energy sector. Many energy imports
are generated from mature fossil fuels and hydro sources which
enjoy preferential regulation making it difcult for local renewable
energy plants to compete with the pricing of electricity generated
from fossil fuels.
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system GMM estimation approach
Independent variables Non-hydro capacity
Model 4 Model 5 Model 6
logFindex 4.50***
(0.95)
- -
logDepthindex - 3.93***
(0.96)
-
logAccessindex - - 1.61**
(0.75)
logConsumption 0.62*
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0.0665
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–0.30
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Constant 18.58***
(3.39)
25.62***
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10.43
(9.72)
Observations 70 70 70
Countries 17 17 17
Number of Instruments 13 13 13
AR (2) P-value 0.68 0.39 0.75
Sargan test of overid. restrictions 0.50 0.29 0.21
Standard errors in parentheses ***P<0.01, **P<0.05, *P<0.1
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ANNEX
Table AI: Panel unit root test
Variable Phillips-Perron test Result
Model with trend
Imports 443.9*** I(0)
FDI 309.0*** I(0)
GDP_capita 246.4*** I(0)
Non hydro capacity 519.9*** I(0)
Depth index 329.7*** I(0)
Access index 218.0*** I(0)
Consumption 679.4*** I(0)
Signicance Level *** p<0.01, ** p<0.05, * p<0.1
