Determinants of financial development across the mediterranean

Abstract

Casual observation shows that that the financial systems in the SEMC are unable (or unwilling) to divert the financial resources that are available to them as funding opportunities to private enterprises. Using a sample of both EU-MED and SEMC for the years 1985–2009, we empirically assess the reasons underlying such conditions. The results show that strong legal institutions, good democratic governance and adequate implementation of financial reforms can have a substantial positive impact on FD only when they form a comprehensive package. Moreover, inflation undermines banking development, but less so when the capital account is open. Government debt growth weakens credit growth, which confirms that public debt ‘crowds out’ private lending. Lastly, capital inflows appear to primarily have an income effect, increasing income and thereby national savings, and thus increasing the availability of credit.