Financial Development in the SAARC Region: Identifying Influential Factors

Abstract

The study aims to explore the determinants of financial development in SAARC countries by using the panel data of eight SAARC countries over the time period 1990-2022. The study used the Autoregressive Distributed Lag Model (ARDL) to determine the factors that affect financial development. The study used domestic credit to the private sector as a proxy to measure financial development as a dependent variable while independent variables are GDP per capita growth, trade, lending interest rate, gross domestic saving, GDP deflator, and broad money. The study has also applied Granger Causality analysis to determine the causal relationship between variables. The findings of the study indicate that lending interest rate and GDP deflator have a negative impact on domestic credit and GDP per capita growth, trade, gross domestic saving, and broad money have a positive impact on domestic credit. The study recommended that governments of these countries should promote trade openness, growth, saving and broad money to boost financial development. It is also suggested that policymakers should make policies to reduce the interest rate and inflation to promote financial development in SAARC countries.