Effect of financial development on economic growth: An empirical analysis of emerging countries

Economic growth and financial development share a dynamic relationship. Financial development allows allocation and mobilization of savings towards productive investment, offers a range of financial services to diversify risks, easy access of financial services, fosters entrepreneurship and facilitates international trade and in this way financial sector contributes towards economic growth. This paper studies the effect of financial development (taking financial institutions and financial markets components) for 11 Emerging countries from 2007 to 2017. Using Random Effect Model we found that financial institutions represented by financial system deposits to GDP and number of branches of commercial banks per 1,00.000 adults have positive impact on economic growth but financial markets represented by stock market capitalisation and turnover ratio have negative impact on economic growth. The policy makers should continue to strengthen financial institutions but also should implement policies that make sure deeper integration of financial markets with financial institutions that will drive economic growth for these countries.