What drives the development of the MENA financial sector?

We explore a wide range of macroeconomic, fiscal and institutional factors in order to assess their relevance as determinants of financial development in MENA countries. A first interesting result is that bank and non-bank development are affected differently by the determinants under consideration. For example, growth does not promote banking activity; it promotes development of stock market liquidity. While we find that better institutions, in general, have a positive and significant effect on financial development, some institutional aspects matter more than others do. We also present evidence on the impact of macroeconomic factors, such as investment, inflation, savings, trade openness and financial liberalization, as key determinants of financial development in the MENA region, further reflecting a sharp contrast between bank and non-bank activity. Our results are robust to different specifications and different estimation techniques.