Institutional Investors And The Finance-Growth Nexus: Evidence From South Africa

Abstract

Since the 1990s assets of institutional investors have remained elevated in comparison to those of deposit-taking financial institutions in South Africa. This paradigm shift in the financial markets has provoked the ongoing theoretical and empirical debate, which, on the one hand, pits institutional investors as causing financial ‘disintermediation’ against, on the other hand, deposit-taking financial institutions in promoting economic development. These and other conflicting views on financial intermediation have promoted the ‘finance-growth nexus’ hypothesis, which draws lessons from the Patrick (1966) ‘demand-following’ and ‘supply-leading’ propositions (Patrick, 1966). The study uses the Johansen (1991) co-integration tests, the vector error correction and the Granger causality approaches to establish the role played by institutional investors in the finance-growth nexus in South Africa based on quarterly data spanning 1994 to 2009. Findings suggest that a ‘demand-following’ phenomenon exists in South Africa in which the growth in the institutional investors’ industry is dependent upon the level of economic development and banking sector development.