CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The growing significance of household consumption as a driver of economic growth has attracted and received increased attention from academia and policymakers alike. While traditional theories often underscore the role of financial systems in economic development, an increasing focus is being placed on how consumption patterns shape and sustain economies, particularly in developing regions. Over the past decades, household consumption has emerged as a critical component of aggregate demand, influencing production, employment, and overall economic stability (Deaton & Muellbauer, 1980). Keynes (1936) identified consumption as a principal factor in economic growth, arguing that marginal propensities to consume significantly impact income levels. This idea has been supported by modern empirical research, which demonstrates the cyclical and structural relationship between consumption and economic development (Kumar et al., 2022).

In developing economies, household consumption often accounts for a large proportion of GDP, reflecting its vital role in economic dynamics. According to the World Bank (2021), consumption expenditures in Sub-Saharan Africa constituted over 60% of GDP on average. This underscores the importance of understanding consumption behaviors, especially in regions where financial exclusion and income disparities persist. Policies aimed at stimulating household consumption often involve improving financial inclusion, increasing disposable income, and addressing structural barriers to market access (IMF, 2020). Improved consumption patterns not only enhance living standards but also create a multiplier effect on production and investment, reinforcing economic growth.

Historically, scholars such as Modigliani and Brumberg (1954) and Friedman (1957) have provided foundational insights into consumption through the life-cycle and permanent income hypotheses. These theories emphasize the interplay between income levels, saving rates, and consumption expenditure, offering critical perspectives on household decision-making. Recent studies, however, highlight the dynamic impacts of emerging factors such as technological innovation, urbanization, and changing demographic trends on consumption (UNDP, 2019). Digital financial platforms, for instance, have significantly influenced consumption behaviors by increasing accessibility to credit and improving transaction efficiencies (Ndung’u, 2019).

In Sub-Saharan Africa, financial inclusion initiatives aimed at enhancing household consumption have seen mixed success. Mobile money platforms such as M-Pesa in Kenya have revolutionized financial access, allowing households to save and borrow efficiently. This innovation has had positive spillover effects on consumption by enabling households to meet recurrent expenses and manage financial shocks (Klapper et al., 2016). Yet, in Cameroon and other Central African nations, financial exclusion remains a significant challenge. Limited access to affordable financial services constrains households’ ability to smooth consumption and invest in long-term welfare (IMF, 2018).

Cameroon’s financial sector has undergone numerous reforms aimed at stimulating household consumption and economic stability. Despite progress, challenges such as high borrowing costs, limited rural outreach, and financial illiteracy persist (World Bank, 2019). A substantial proportion of the population remains dependent on informal financial systems, which lack the capacity to support consistent consumption growth (Anyanwu & Anyanwu, 2017). This limits households’ ability to leverage financial instruments for consumption smoothing or asset accumulation. Cameroon harbors the Bank of Central African States (BEAC), which is the central bank of all the member states of the Economic Community of Central Africa States (CEMAC) to which Cameroon belongs with headquarters being in Yaoundé. Commercial banks, postal banks (CAMPOST), insurance companies, non-banking financial institutions, and the Douala Stock Exchange (established in 2002) are under the supervision of this central bank. This central bank (BEAC) replaced the central bank of the states of Equatorial Africa which Cameroon became a member in 1972. In 1993 the member states of BEAC created a supervisory authority, known as Commission Bancaire de l’Afrique central (COBAC) whose role is to secure and regulate the regions banking system.

Cameroon’s financial sector over the years has witnessed significant financial reforms with all of them aiming at enhancing increased household consumption and overall economic growth and stability. Despite these efforts, the sector’s performance remains mixed, with challenges such as limited access to financial services, high interest rates, and a lack of financial inclusion (World Bank, 2019). A significant portion of the population, especially in rural areas, lacks access to formal financial services. This limits their ability to save, invest, and manage financial risks effectively (IMF, 2018). The cost of borrowing remains high, discouraging households from taking loans for consumption or investment purposes (Cameroon National Institute of Statistics, 2019). Despite some progress, financial inclusion remains low, with many households still outside the formal financial system (World Bank, 2019).

In 1999, Cameroon’s banking system consisted of nine commercial banks with 60 branches. Although bank branches decreased from 105 in the year 1995 to 104 in the year 2005 and as well became concentrated in the big cities, there was however a significant increase in the number of banks from eight banks in 1995 to 10 in 2005. This number has increased further to 15 in 2017 with Credit Communautaire d’Afrique (CCA) gaining the status of a commercial bank. The banking sector plays a major role in the financial sector of Cameroon; it accounted for about 84.4% of the total assets of the financial sector in 2005, and contributed 19.6% to GDP. Although the financial sector in Cameroon is still not well-developed, it encompasses the largest financial sector in the CEMAC zone, and contributes about 55% of CEMAC’s financial assets in 2005, the bulk of which is from the banking sector.

Poverty cannot be eradicated completely with consumption and growth increasing fully when a larger percentage of the population continuously and persistently live and work within the informal financial environment that does not guarantee access to cheaper and adequate financial instruments that will help them build wealth and sustainable financial security for themselves and family, (Anyanwu & Anyanwu, 2017).

Research has shown that household consumption in Cameroon is heavily influenced by income levels, remittances, and access to credit (Cameroon National Institute of Statistics, 2019). However, regional disparities in financial access exacerbate consumption inequalities, particularly between urban and rural areas. The World Bank (2017) noted that only 20% of Cameroonians have a bank account, a figure significantly lower than global averages. This gap underscores the need for targeted policies to address financial inclusion barriers and enhance household consumption capacity.

Technological innovation has emerged as a key driver of household consumption in recent years. Digital financial platforms, including mobile money and online banking, have improved the accessibility and affordability of financial services, particularly for underserved populations (Financial Sector Deepening, 2019). These innovations enable households to participate more actively in the economy by facilitating payments, improving access to credit, and enhancing savings mobilization. For instance, mobile money services in Cameroon have demonstrated significant potential in bridging the consumption gap, particularly for rural households (IMF, 2020).

Understanding the determinants and dynamics of household consumption is essential for crafting policies that promote inclusive and sustainable economic growth. This study seeks to examine the impact of on household consumption in Cameroon, focusing on how improved financial access and inclusion can enhance consumption patterns. The last two decades have witnessed rapid technological innovations which have massively transformed the global financial system. In particular, and as observed by the World Bank (2020), the vibrant technology-driven innovations have enabled the proliferation of novel financial products and numerous mobilisation channels. All these technological innovations have prompted the emergence of digital financial platforms which have substantially augmented efficiency in financial product delivery through increased pace, transparency, security, and accessibility of tailored financial services across all segments of the population. There is indeed a consensus in the literature that financial innovation contributes to economic growth and hence consumption by facilitating capital mobilization, financial intermediation, capital formation, and generally the overall development of the financial system (laeven et al., 2015; nazir et al., 2020).

 Recent reports revealed that the financial sector in Cameroon is still not well-developed, although it encompasses the largest financial sector in the CEMAC zone, and contributes about 55% of CEMAC’s financial assets in 2005, the bulk of which is from the banking sector. In spite of its contribution to economic growth and other vital macroeconomic variables. larger percentage of the population continuously and persistently live and work within the informal financial environment that does not guarantee access to cheaper and adequate financial instruments that will help them build wealth and sustainable financial security for themselves and family, (Anyanwu & Anyanwu, 2017).

1.2 Statement of the Problem

In Cameroon, many families still struggle to meet their daily needs, and one of the main reasons is the poor state of the financial sector. Although banks, microfinance institutions, and mobile money services exist, many people especially in rural areas do not have access to them. This makes it hard for households to borrow money, save safely, or invest in their future. When families can’t access good financial services, they are forced to depend on informal methods like borrowing from friends or local lenders, which are often unreliable and risky. As a result, their ability to spend on food, health, education, and other basic needs is limited. This ongoing problem affects the overall well-being of households and slows down the country’s economic growth (Folefack & Tieguhong, 2014).

Some researchers have already looked at the connection between financial development and economic progress in Africa. They found that when financial systems work well, they help people save, invest, and manage their money better, which leads to growth and less poverty (Beck, Demirgüç-Kunt, & Levine, 2007). In Cameroon, a few studies have focused on how access to microfinance can help reduce poverty (Ndikumana, 2018), but not much has been done to explore how financial sector growth directly affects household spending. Most of the available research uses national-level data and doesn’t consider the daily realities of households or how different types of financial services might affect them in different ways. This means there are still big gaps in what we know.

Today, there have been some efforts to improve the financial system in Cameroon, such as promoting mobile money use and expanding microfinance outreach (Tchouassi, 2012; Fonchingong & Fonjong, 2020). These reforms have slightly improved access to financial services, especially in urban areas. However, many households—particularly in remote communities—still lack access to formal financial institutions and products, which continues to limit their ability to manage finances and plan for the future (Acha, 2011). This situation raises an important question: Are the current developments in the financial sector truly improving household consumption levels across the country? Addressing this issue is crucial for shaping policies that enhance household welfare and promote inclusive economic growth.

1.3 Research Questions

1.3.1 Main Research Question

• What is the effect of financial sector development on household consumption in Cameroon?

1.3.2 Specific Research Questions

• What is the effect of financial depth on household consumption in Cameroon?
• What is the effect of financial efficiency on household consumption in Cameroon?
• What is the effect of financial institution access on household consumption in Cameroon?

1.4 Research Objectives

1.4.1 Main Research Objective

• To investigate the effect of financial sector development on household consumption in Cameroon

1.4.2 Specific Research Objectives

• To determine the effect of financial depth on household consumption in Cameroon
• To analyze the effect of financial efficiency on household consumption in Cameroon.
• To assess the effect of financial institution access on household consumption in Cameroon