This study empirically evaluates spatial externalities in financial development in the Southern African Development Community (SADC) in line with spatial proximity theory. The study specifically tests whether financially less developed economies in SADC benefit from their linkages with and proximity to South Africa, a financially developed economy. GMM and Dynamic Fixed Effect estimations established that financial development in the SADC is not immune to spatial externalities. Results indicate that monetary measures are more sensitive to geography than credit. Allowing for spatiality, credit from South Africa displays strong positive spatiality under Dynamic Fixed Effects but no effect under GMM, possibly responding to crowding-out, South Africa’s global linkages and natural flow of credit towards optimal returns. Implicitly, the spatial variable has a strong complementary effect in the money market and a relatively inconsistent complementary effect in the credit market. Estimations that controlled for effects of monetary union in the model also confirm that financial development is affected by spatiality in the money market and is less responsive to spatial effects in credit. The current level of trade and financial openness in SADC is not enough to facilitate financial development in other subsectors of the financial sector, beyond money.

Keywords : Spatial Externalities; Spatiality; Financial Development; SADC.