The Effect of the Financial Sector development on Growth: The case of the MENA Countries

This research aims to examine the impact of financial development on economic growth in the context of the MENA countries. The study considers a number of measures of financial development that are: private credit to GDP, M2/GDP, the ratio of commercial bank assets to the total of commercial bank assets and central bank assets. We also take growth rate of real GDP as dependent variable and few core control variables of economic growth. This study employs as well panel time series data over the year of 1980-2012 for each indicator for a split sample of 11 MENA countries. In order to measure the impact, this study analyzes the data by applying panel autoregressive distributed lag (ARDL) framework of pooled mean group (PMG), mean group (MG) and Dynamic fixed effect (DFE) estimators. The result obtained from PMG estimators demonstrates that the financial intermediary has a negative effect on the growth rate in the MENA countries in the short and long run. The paper concludes by pointing out directions to improve financial development in the MENA countries by applying more financial reforms to promote competition in the financial sector and financial structure expansion that reflects in the improvement of the quality and quantity of financial services. On the other hand, taking further steps to create an appropriate legal environment may further help the MENA countries to reap the utmost benefits by maximizing the potential role of the financial system in the real sector.