Does Shadow Banking Moderate The Effect Of Inflation On Foreign Portfolio Investment In African Economies? Evidence From African Economies

Saheed Oluwaseun Lawal; Abdurrauf Babalola; Saidat O. Onikosi-Alliyu

Authors

Saheed Oluwaseun Lawal Department of Economics, Faculty of Management Sciences, Al-Hikmah University, Ilorin Nigeria Author
Abdurrauf Babalola Department of Economics, Faculty of Management Sciences, Al-Hikmah University, Ilorin Nigeria Author
Saidat O. Onikosi-Alliyu Department of Economics, Faculty of Management Sciences, Al-Hikmah University, Ilorin Nigeria Author

Keywords:

Foreign portfolio investment, Inflation, Shadow banking, Moderating effect, African economies, Panel data

Abstract

The continuing issue of the problem of securing foreign portfolio investments (FPI) in Africa amid inflation problems poses the question of whether shadow banking changes the link between inflation and FPI. This paper seeks to explore whether shadow banking affects the influence of inflation on FPI in African economies using annual secondary panel data from 2000 to 2025. The sample includes African nations chosen depending on the existence of constant observations regarding the variables in the research, leading to the collection of 1,404 country-year observations. Data will be acquired from relevant international and financial databases. Shadow banking will be represented through non-bank financial intermediation, which refers to the domestic non-financial sector held by other financial institutions as a percentage of GDP, and will be gotten from the World Bank’s Global Financial Development Database indicator. Panel least squares, random-effect estimation, and fixed effects estimation techniques will be used, with the pooled panel least squares being chosen as the preferred technique after conducting panel specification tests. It is found that inflation has a negative but statistically insignificant effect on FPI, whereas the direct coefficient of shadow banking is positive but statistically insignificant. Inflation-shadow banking interaction is also negative, albeit statistically insignificant, with no statistically significant proof that shadow banking acts as a moderating factor in the relationship between inflation and FPI in the selected economies. The GDP growth rate has a positive and statistically significant coefficient; this means that good economic performance is related to increase FPI. The study concluded that the moderating role played by shadow banking is statistically insignificant within the study period. It is recommended that there be credible inflation control and proper management of non-bank financial intermediation.