A Co-Integration Analysis of Interest Rate Spread and Corporate Bond Market Development in Selected African Economies

This paper examines the relationship between interest rate spread and corporate bond market development in thirteen African economies comprising Botswana, Egypt Mauritius Nigeria, Tunisia, Cameroon, Kenya, Morocco, South Africa, Cote d'Ivorie, Ghana Namibia, Tanzania from 2004 and 2014 using fully modified ordinary least square (FMOLS) in an autoregressive distributive lag (ARDL) framework. Subsisting literature suggests that in bank-based economies, interest rate spread could adversely affect the potency of corporate bond market development; and thus limits the financial market competitiveness. The result provides evidence that corporate bond issue, as proxy for financial development is negatively influenced by interest rate gap in the short and long term. The result affirms the 'group interest' theorem in these African economies leading to a deterrent in competitive financial development. The ECM coefficient satisfies a priori expectation, affirms the short run dynamic relationship, which implies long run equilibrium from the annual speed of adjustment, which is about 100 percent. The paper suggests policy recommendations for the reduction in interest rate, and thus the spread to encourage the growth of corporate bond issues for a market-led financial development.