Financial development and economic growth: Evidence from emerging South Asian economies

Abstract

The research examines the relationship between financial development and economic growth in the South Asia region for both long- and short-term aspects, as well as the impact of globalization. We used panel data from seven South Asian Association for Regional Cooperation (SAARC) members: Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka, for the period 1980–2023. For the data and our empirical research, we used World Bank sources. In our research, we employed three robust methods: OLS, FMOLS and DOLS for cointegration analysis, and System-GMM for dynamics. There exists a robust and positive long-term relationship. A unit increase in financial development correlates with a subsequent 0.40 to 0.43 percentage point rise in GDP growth. Financial institutions have a greater impact than financial markets, with a beta value of approximately 0.10. Long-term cointegration exists, with growth being driven solely by financial development in one direction. Globalization further enhances this effect by about 22%, although inflation has a slightly negative effect. The study concludes that financial development is a key driver of growth in South Asia, particularly via formal financial institutions and in more globally integrated economies. Policy recommendations are made to enhance financial institutions and access to credit, promote digital financial inclusion, and deepen regional and global economic integration. Such regulatory reforms and investments in fintech infrastructure will modernize the financial system and further sustainable and inclusive growth in the region. Countries in South Asia would benefit from developing their financial institutions, expanding credit, improving financial inclusion, and further expanding both global and regional links to maximize the potential benefits that can be derived from financial development.