Financial Development and Environmental Sustainability in Sierra Leone: Evidence from an ARDL–EKC Framework (1990–2024)

This study examines the relationship between financial development and environmental sustainability in Sierra Leone using annual time-series data from 1990 to 2024. Carbon dioxide (CO₂) emissions are used as a proxy for environmental degradation, while domestic credit to the private sector captures financial development. To test the Environmental Kuznets Curve (EKC) hypothesis, a nonlinear specification is adopted. The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed to address mixed integration orders and small-sample issues. The results confirm the existence of a long-run cointegrating relationship among the variables. Long-run estimates reveal a U-shaped relationship between financial development and CO₂ emissions, indicating that initial financial expansion reduces emissions, but further deepening increases environmental degradation beyond a threshold level. Foreign direct investment is found to reduce emissions, supporting the pollution halo hypothesis, while trade openness increases emissions through scale effects. The error correction term is negative and statistically significant, confirming a stable long-run adjustment process. These findings suggest that financial development in Sierra Leone contributes to environmental sustainability only at early stages, while deeper financial expansion without effective regulation exacerbates carbon emissions. The study highlights the need for policies that integrate environmental considerations into financial sector reforms, promote green financing, and strengthen environmental regulation to achieve sustainable development.