Institutional Determinants of Financial Development in MENA countries

Developed and well regulated financial markets are usually seen as a precondition for an efficient allocation of resources and can foster long term economic growth. This paper explores the institutional determinants for financial development in the countries of the Middle East and North African (MENA) region. Institutional conditions are from the International Country Risk Guide. Panel‐econometric techniques are applied to assess the development in the banking sector and the stock market. As a main finding, institutional conditions are important in both financial segments, even after controlling for standard macroeconomic determinants and fixed effects. For the banking sector, corruption seems to be most decisive. For the stock market, the impact of corruption and law and order appear to be relevant. While per capita income and inflation do not seem to play a vital role, openness to foreign trade is quite important for all areas of financial development. Hence, overall, faster real economic integration is of key policy priority to improve financial development as a condition for higher GDP growth. Better law and enforcement practices and anti‐corruption policies are strategies to accompany this process.