The Impact of Financial Development on Economic Growth: Does Climate Change Vulnerability Matter?

This study examines the moderating effect of climate change vulnerability on the relationship between financial development and economic growth across 49 African countries from 2000 to 2023. Using a range of econometric methods, including two-way system GMM, Method of Moments Quantile Regression, Partially Linear Functional Coefficient model, and a propensity score matched triple-difference (PSM—DDD) framework, we find that financial development significantly promotes economic growth. However, this effect is weakened by climate vulnerability, particularly climate exposure and sensitivity. The results show that climate exposure has a more substantial dampening effect than climate sensitivity, with the effect being most pronounced in economies with high climate vulnerability and low economic growth. Additionally, the relationship varies across financial structures, with bank-based finance being more severely constrained by climate vulnerability compared to market-based finance. The heterogeneity analysis reveals that the moderating effect of climate change vulnerability is most significant in economies with low financial development and in Eastern African countries. These findings emphasize the importance of integrating climate vulnerability into financial strategies, strengthening bank-based financial systems, promoting financial diversification to mitigate climate-related risks, and enhancing regional cooperation to build more resilient financial systems.