FINANCIAL DEVELOPMENT, GOVERNMENT FUNDING AND INFRASTRUCTURAL DEVELOPMENT IN SOUTH AFRICA

177 International Journal of Social and Educational Innovation Vol. 12, Issue 24, 2025 ISSN (print): 2392 – 6252 eISSN (online): 2393 – 0373 DOI: 10.5281/zenodo.17572968 FINANCIAL DEVELOPMENT, GOVERNMENT FUNDING AND INFRASTRUCTURAL DEVELOPMENT IN SOUTH AFRICA Kayode David KOLAWOLE (PhD) Department of Financial Intelligence, College of Accounting Sciences, University of South Africa [email protected] 0000-0002-6704-2673 Abstract The purpose of this paper is to identify the driving elements of the South African financial sector. While South Africa’s financial sector appears robust, there exists a dearth of empirical research investigating the determinants of its development. Thus, this work assesses how two critical factors: Infrastructure development, and government funding levels affect financial development (FD) in South Africa using annual data from 1990 to 2024. Preliminary findings show that the series are integrated, and they are cointegrated. Results from regression analysis suggest that the government funding exerts a positive and statistically significant influence on financial development across most indicators. Conversely, advanced infrastructure development, government funding and openness to trade are associated with a more developed financial sector. The implications of these findings are essential for policymakers and stakeholders in understanding the factors that drive financial development in South Africa. The study recommends that, among others, policymakers should prioritize investments in both physical and digital infrastructure, particularly in telecommunications. Keywords: Financial development, Government funding, Infrastuctural development, South Africa Introduction In every economy, a financial development (FD) is necessary in order to achieve the desired level of economic development (Giri et al., 2023). The fact that financial development allows effective and efficient credit screening has been argued by scholars like Schumpeter (1911) International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 178 since the beginning of the twentieth century, which in turn promotes productivity and growth. Financial development leads to the start of growth in a given economy as observes Levine (1997) as a result of the growth of savings which serves as a catalyst to investment. It also focusses on risk and optimises risk-return distribution (Adu et al., 2013). FD is a development contributor as it promotes inflow of foreign capital and the optimal use of capital (Manigandan et al., 2023). In addition, it alleviates poverty and inequality through providing access to finance to poor households built up of vulnerable households and through providing the possibility to hedge against shocks (Xu et al., 2023). Other researchers have established that financial development promotes research and development (Huang, 2010; Kapidani and Luci, 2019), hence economic growth. As a result, an increase in the financial sector of many countries has been pursued to enjoy the benefits associated. Theories have been developed on possible causes of financial development, and there is empirical research aimed at finding the factors that can make finance develop at varying levels in countries (Anyangwe et al., 2022; Bekele, 2023). In the case of most of African countries, the financial sector has been sufficiently poor that most banks became insolvent, others developed as troubled institutions. South Africa is one of the regional states that seem to have a sound financial sector (FSCA, 2022). The ratio of inward credit to GDP in recent decades has been more than 100 percent (World Bank, 2023). According to some researchers, the financial sector in South Africa has been favorable by the fact the state is a developing nation (Abiodun and Temidayo, 2022; AsafoAdjei et al., 2021). It is timely to determine the elements that have led to creation of robust financial sector in the nation, as well as those that are trailing. Empirical studies have found that there are many factors that have an impact on financial development among them being inflation, trade openness, interest rates, and GDP (Asratie, 2021; Ashour et al., 2023; Nsiah and Tweneboah, 2023; Zhang and Liang, 2023). Nonetheless, the results are still conflicting because of the opposing evidence. Besides that, although there is controversy surrounding the issue of how infrastructural development (ID) affects financial development (Mohanty and Bhanumurthy, 2019; Tsaurai, 2025), the influence of ID on the FD of South Africa is insufficiently understood. The construction of infrastructures can also hinder FD by the resource-curse hypothesis (Udeagha and Breitenbach, 2023; Kwakwa et al., 2023). On the other hand, infrastructure may also facilitate financial growth by offering facilities which facilitate business activities in the International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 179 industry (Rafailov, 2019). The efficiency of consumers has grown due to technological advancement, especially in infrastructure, and, thus, leads to the significant investment of countries that want to capitalize on such technology (Syarifuddin & As’ad, 2024). The infrastructure investment has attributed to a 120 percent increase in the infrastructure investment, as South Africa is a major infrastructure country in the continent and experienced an increase in the year 2010 of about R 12 trillion and in 2021 of about R 25 trillion (World Bank, 2023). The amount spent on infrastructural development in the country rose to R 23 trillion in 2015 to R 46 trillion in 2018 (Independent Communications Authority of South Africa, 2020). However, how this infrastructural development can influence the FD of the country has not been known yet. Another variable, the government funding, was not empirically analyzed as well, where the government spending can have either positive or negative impact on financial development. High government expenditure could require extra cost. In this case, the state can borrow locally thereby tightening local businesses and decreasing the demand of financial services by the local businesses. Alternatively, the state funding will have a positive impact on the financial growth, as it will enlarge the operations of local companies and thereby their requirements of any financial support (Wasnik and Jain, 2023; Rafailov, 2019). The government spending in South Africa has been on the increase since the amount of US$37.1billion spent by the country in 1990 to US$69billion in 2020 (World Bank, 2023). Its level of influence over FD in the country is yet to be researched. A robust financial sector helps South African government to support its long term and medium economic objectives (Republic of South Africa, 2023). In this regard, evidence-based policy-making requires the study of the dynamics of the financial growth of the country today. Such analysis needs to pay attention to significant variables that have been neglected in the literature. Based on the aforementioned, the following are the research questions for this study: a) What effect do infrastructural development affect South Africa’s financial development? b) To what extent does government funding affect South Africa’s financial development? The article contributes three substantive items to the literature: (1) Although much scholarly research has investigated the determinants of the financial development of African countries (Emmanuel et al., 2023; Xu and Wubishet, 2024; Okafor, 2023), more empirical evidence based on the connection of government support, infrastructural development, and financial International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 180 development still lacks South Africa. South Africa has been one of the most developed economies in Africa, and thus the experiences in this country are specifically informative to the continent in general. (2) The empirical tests to be carried out in this research will determine the role of government financing and infrastructural development that has often been ignored in previous studies on the financial development of South Africa. The past literature on the topic has generally utilized one or two proxies of financial development. Contrarily, this article makes use of six alternative measures thus countering any potential difference in measurement which could have resulted into inconclusive findings in previous research. Use of several proxies enables the policymakers to discover specific areas of finance that are valuable to invest in which will result in more favourable funding results and advances in infrastructure. Review of literature and hypothesis development The variables that can affect financial development in a particular country are government financing and infrastructural development. In that regard, the given paper will overview the literature available to establish the level at which the financial development of a country is predisposed by the influence of natural resources, the scale of governing, and the scale of infrastructure. The literature review has not revealed a significant amount of the original investigations devoted to the needs of South Africa, which supports the current study as a novel domain of investigation into the impact of government support on financial development and infrastructure promotion. The rest of the literature review has been divided into two parts. The initial part will deal with the role of infrastructure in financial development, whereas the second section will touch on the overall effects of infrastructure of a country in financial development. 2.1. Infrastructure Development and Financial Development A growing amount of academic interest has been focused on how infrastructural development impacts financial development in various economies (Abeka et al., 2021; Fan and Chan-Kang, 2008; Landau, 2013; Mahmoudzadeh et al., 2013; Mohmand et al., 2017; Tariq et al., 2019). According to other research, it is probable that investments in physical infrastructure and information and communication technology (ICT) will boost financial development through the creation of better access to markets, greater transmission of information, and financial inclusion (Abeka et al., 2021). According to Omowole et al. (2023), the change in the financial sector was majorly in the new infrastructure especially in the ICT sector to ensure efficiency International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 181 in its operations and the provision of more services. Koldovskiy (2024) also purported that ICT infrastructure decreased the information asymmetry and transaction costs thus spurring financial intermediation. Bernards and Campbell-Verduyn (2019) have also shown that infrastructure has the capacity to expand auditing, enhance innovation in financial products and institutional efficiency particularly in the ICT sector. Moreover, Munira (2025) has noted that the application of mobile and digital technologies has been positive in driving the economy and dynamism in financial markets because it allows realtime transactions and expands access to customers. However, other researchers also warned that in case of too much government expenditure on infrastructure, the activity of the private sector might be inhibited, which might in turn slow down the economic and financial growth (Landau, 2013; Mahmoudzadeh et al., 2013). However, a positive contribution of infrastructure was mentioned by Mohanty and Bhanumurthy (2019), who proposed that proper infrastructure development spurred private investment in capital and financial market penetration. This is further supported by empirical studies that have been done in Africa. Abeka et al. (2021) discovered that the telecommunications infrastructure in Sub-Saharan Africa boosts financial development, and reasoned that policies to widen both digital and physical access framework are imperative in deepening the financial markets. It can be said in the same way that mobile banking and digital infrastructure have a positive influence on the development of financial sector in Ghana, as stated by Anyangwe et al. (2022). The authors found that in Africa, access and financial depth continue to increase with the development of ICT, especially when there is the presence of strong regulatory bodies (Raifu et al., 2023). The assertion of ICT advancement enhancing financial growth in urban centres was also confirmed by Tchamyou et al. (2018), but Ofori et al. (2022) established the opposite effect, thus, the moderation of institutional quality and country location. The issue still under discussion of whether investment growth will always enhance financial growth depends on the quality and nature of the investment. An efficient and productive infrastructure is probably to increase the financial output, but inefficient or poorly controlled investment could have nothing, or opposite impact. Hypothesis 1: Improvement in infrastructural development has a strong positive relationship with financial development. International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 182 2.2. Government Funding and Financial Development Government funding is a facet focal point in as far as the level of financial development (FD) in the country is concerned. Varied literature has argued that with an efficient direction and focal allocation, a government expenditure can have the ability to hasten financial deepening through improving the productive potential of an economy (Adu et al., 2013; Levine, 1997; Giri et al., 2023). Public financing has an influence on FD through various channels of transmission. First of all, due to the directing of the public expenditure into productive investment and capital works, it can prompt the activity of the private sector and increase the credit demand, as well as reinforce the financial intermediation (Ataguba, 2023; Asafo-Adjei et al., 2021). Also, the direct allocation of funds to specific economic sectors of such strategic priorities as manufacturing, agriculture, or infrastructure creates a facilitating environment in which financial institutions can expand their offering of products and diversify their credit portfolio (Alshubiri et al., 2020; Nsiah and Tweneboah, 2023). On the other hand, these gains can be tampered by lavish or uneconomical state expenditure. The government can increase spending, which is to a great extent funded by domestic borrowing, and this development, researchers like Al-Majali (2018) and Kulu et al. (2022) contend, can suppress investment in the private sector and dry up credit to productive enterprises. The latter crowding-out effect can reduce the efficiency of capital allocation among the financial sector (Adu et al., 2013; Anyangwe et al., 2022). Moreover, it can lead to macroeconomic instability, attracting the loss of investor confidence, and slowing down the evolution of the financial system because of poor financial management and misappropriation of government funds (Abiodun and Temidayo, 2022; Ashour et al., 2023). There is still a heterogeneous empirical of interaction between government spending and FD. As an example, the studies conducted by Mateen et al. (2025) and Asafo-Adjei et al. (2021) show that state spending on productive sectors increases financial development by having a positive effect on financial inclusion and mobilization of capital. Conversely, studies by Zhang and Liang (2023) and Asratie (2021) have shown that higher borrowing by individuals and expansion of fiscal deficits is likely to weaken FD which redirects finance to the private sector. Furthermore, Giri et al. (2023) argue that the quality of fiscal institutions and the success of government spending determines the public funding effect on FD greatly. Lack of transparency and accountability can encourage rent-seeking and inefficiency instead of financial growth International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 183 because increased spending can lead to rent-seeking (Uras et al., 2020; Natision et al., 2022; Liu et al., 2020). Regarding the case of South Africa in particular, the public spending has increased significantly since the overthrow of apartheid, and it has increased since 1990 by US 37.1billion up to 2020 (US 69billion) and above (World Bank, 2023). Even though this expansion is based on the idea of inclusive growth and development of infrastructure, this issue is still controversial about its efficiency in enhancing financial development. It is postulated by some scholars as the country has investment, which has been extensive in the form of the public sector, has aided FD by promoting the demand of capital by the private sector and increasing the availability of finance to the businesses (FSCA, 2022; Republic of South Africa, 2023) and others as holds that regularly troubled fiscal deficits have limited investment in the business sector. In general, the role of government financing in the financing of financial development is usually comprehended to depend on the efficiency, transparency within government expenditure, as well as their orientations. Effective government subsidies are able to stimulate the money market and deepen the financial market when the subsidies are well-placed, and more so can be counter-productive as the subsidies are continued when they have no impact whatsoever on the financial market. Hypothesis 2: There is a positive relationship between government funding and financial development in South Africa. Methodology Empirical Specifications The research seeks to examine the impact of infrastructural development and government funding on financial development (FD) in South Africa. Based on the objective and previous studies (Levine, 1997; Adu et al., 2013; Kapaya, 2023), the South African financial development can be approximated by estimating the effect of trade openness and inflation, two of the macroeconomic forces found in earlier empirical study papers (Ibrahim & Sare, 2018; Menyah et al., 2014; Asante et al., 2023). The functional relationship is thus expressed as: FD = f(GFt, IDt, TOt, INFt) (1), where GF, ID, TO, and INF represent government funding, infrastructural development, trade openness, and inflation, respectively. Specifying Equation (1) within a Cobb–Douglas International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 184 production function framework and linearizing by taking the natural logarithm of all variables gives: lnFDt =α+σlnGFt+γlnIDt+ϕlnTOt+βlnINFt+μt (2), where ln denotes the natural logarithm, and σ,γ,ϕ,β, and α are parameters to be estimated. This model structure aligns with the empirical approaches of Asratie (2021), Nsiah and Tweneboah (2023), and Zhang and Liang (2023), who employed similar functional specifications in assessing the macroeconomic drivers of financial development across emerging economies. Data and Estimation Approach The information used in the study was obtained in The World Bank (2023) World development indicators 1990-2024. The time to select was informed by the fact that equally comparable data was available on all the variables that were used in the analysis. Some of the indicators introduced to measure financial development (FD) were used according to the methodological decisions made in the past (Adu et al., 2013; Mohieldin et al., 2019); that is, a measure of domestic credit to the private sector as a percentage of GDP and domestic credit to the private sector supplied by banks. Through Principal Component Analysis (PCA), these actuals were, in a Composite Financial Development Index (FINDEX), to integrate the overall development of finance throughout the chosen period of time (Giri et al., 2023). Total government expenditure as a proportion of the GDP was operationalised as a form of government funding (GF); based on the methods used by Acemoglu and Johnson (2005) and Boschini et al. (2013); it is a proxy measure of both fiscal health and the overall effects of government spending on the financial sector. Infrastructure development (ID) was estimated using gross fixed capital formation (as a percentage of GDP) and further developing it with government investment in the sectors of transport and communication, which was the practices of Abeka et al. (2021) and Irfan and Ahmad (2022). Trade openness (TO) was a metric of imports and exports as a proportion of GDP, following the previous assumptions of Ibrahim and Sare (2018) and Menyah et al. (2014), whereas the inflation (INF) served as a control variable, as it has been previously determined to have an effect on financial stability (Asratie, 2021; Nsiah and Tweneboah, 2023). In order to have statistical reliability, all time-series data were evaluated on the assessment of stationarity through unit-root tests. The procedure that was used to test the unit root and structural breaks consisted of the Augmented Dickey-Fuller (ADF) test where the null International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 185 hypothesis of the test included the non-stationarity. In the cases where non-stationarity was observed to exist in level series, first-difference changes were made with the aim of converting level series to the desired level of stationarity and consequently estimated spurious regression outcomes (Phillips and Perron, 1988). Results and analysis Table 1. Descriptive Statistics Variable Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis CPS 106.2581 117.0954 142.422 0 30.62879 -2.37698 8.978879 CPSB 57.29106 59.75637 70.38188 0 11.4575 -3.64057 19.11081 BM 59.67517 65.23814 74.03883 41.51655 10.79432 -0.27005 1.502958 FDI 1.375953 0.903381 9.660265 -0.06007 1.801161 3.170237 14.38337 GF 17.96177 17.90056 20.62034 15.86074 1.225586 0.067174 2.013481 ID 16.35381 15.92217 21.61482 13.05137 1.968418 0.580796 2.797667 INF 6.571533 5.780169 15.33478 -0.69204 3.305272 0.846163 4.141261 TO 50.18786 50.75966 65.97452 34.32135 8.865635 -0.12458 2.141977 Observations 35 35 35 35 35 35 35 Source: Author’s Compilation (2025). Unit root and cointegration results Table 2 shows the outcome of the unit-root test. They disclose that with an exception of FDI, CPSB, and TO, which are held at the same level, the rest of the variables have nonstationarity at the level thus, all of them have unit roots in their level forms. Nevertheless, when differentiated initially, all variables achieve the state of stationarity, which proves that the variables of interest are integrated of order one, I(1). This result suggests that the series are ready to be introduced further econometric analysis, which is the test of the long run relationships. The evidence of the long-run estimation (Table 3) shows there is a long-run relationship between the financial development (FD) and its determinants in South Africa. These results indicate that the bank credit to the private sector, (CPSB), foreign direct investment, (FDI), the size of the government, (GF) and the level of institutional development, (ID) have positive and International Journal of Social and Educational Innovation (IJSEIro) Volume 12/ Issue 24/ 2025 192 Finally, the other determinants of governance and institutions—regulatory quality, control of corruption, and political stability—were not included in the model as such but may be most vital in capturing variation in financial development. Their integration in subsequent research may help in building a more comprehensive view of the relationships between fiscal policy, infrastructure, and the financial system. References Abeka, J. M., Andoh, E., Gatsi, G. J., & Kawor, S. (2021). Financial development and economic growth nexus in SSA economies: The moderating role of telecommunication development. 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