Does an empirical relationship exist between financial development and economic growth in SAARC countries?

Economic theories suggest that a sound and efficient financial system promotes economic growth by fostering efficient allocation of resources. This paper aims to investigate the theoretical prediction about the relationship between financial development and economic growth in SAARC countries. Generalized Method of Moment (GMM) has been applied on panel data of five SAARC countries covering the period from 1984 to 2016 to test the hypothesized relationship. As an empirical proxy for economic growth, the study uses annual percentage growth rate of GDP per capita. The study employs four different indicators of financial development based on domestic credit provided by the financial sector institutions of respective economies. Results reveal notable positive effect of financial development on economic growth in SAARC countries, after controlling the time-constant country-specific effect and the effects of potential bias induced by simultaneity. Thus, empirical findings are consistent with the theories that predict a significant positive role of financial development on the economic growth of a country.