Financial Sector Development as a Moderator of the Growth–Environment Nexus: Empirical Evidence from Selected Sub-Saharan African Economies

This study examines the moderating role of financial sector development in the relationship between economic growth and environmental degradation in selected Sub-Saharan African (SSA) economies. Anchored on the Environmental Kuznets Curve (EKC) hypothesis and supported by ecological modernization theory, the research investigates whether financial development amplifies or mitigates the environmental impact of economic growth. Focusing on seven selected SSA countries—Côte d’Ivoire, Ghana, Kenya, Mauritius, Namibia, Nigeria, and South Africa—between the period 1993 to 2021, the study utilizes a panel data approach. Key indicators of environmental degradation include carbon dioxide (CO₂) emissions and ecological footprint per capita, while financial development is captured through four proxies: credit to the private sector (CPS), liquid liabilities ratio (LLR), market capitalization (MKT), and stock market turnover (SMT). Employing the Pooled Mean Group (PMG) estimator within an Autoregressive Distributed Lag (ARDL) framework, the analysis tests for long-run and short-run dynamics, incorporating interaction terms between GDP per capita and financial indicators. The findings reveal that financial development significantly moderates the growth–environment nexus: CPS and MKT generally reduce environmental stress at higher income levels, supporting the greening finance hypothesis, while LLR shows potential for exacerbating environmental degradation if left unregulated. Additionally, causality tests confirm bidirectional feedback between financial development and CO₂ emissions, highlighting the importance of financial-environment interdependence. The study concludes that while financial development can foster ecological sustainability, its impact is contingent upon institutional quality and regulatory rigor. It recommends that SSA policymakers integrate green finance standards into financial systems, incentivize sustainable investments, and enhance environmental risk disclosure across banking and capital markets, with strategies tailored to country-specific financial and ecological contexts.