Investigating the Institutional Determinants of Financial Development: Empirical Evidence From SAARC Countries

Abstract

A more regulated and better working financial sector contributes toward achieving monetary growth based on proficient resource allocation and reducing information asymmetries. Current trends in research highlight the significance of factors determining the financial sector’s development; therefore, this study explores the institutional drivers, which are indispensable for developing the financial industry in the South Asian Association of Regional Cooperation (SAARC) region. Specifically, it examines the impact of institutional factors, trade openness, real output, legal origin, and inflation on the financial sector’s development. By employing the panel data method of generalized method of moments (GMM), the study concluded that trade openness, institutional factors, legal origin, and real gross domestic product (GDP) have a positive and significant impact on financial depth. However, the inflation rate has been found to affect it negatively. Finally, the study presents policy recommendations based on empirical findings.