The quality of institutions and financial development in mena countries: An empirical investigation

This paper provides new evidence that sheds light on the influence of institutional quality on financial development using data from Middle East and North African (MENA) countries over the period of 1984-2007. To measure institutional quality we construct a yearly composite index (INST) using the International Country Risk Guide’s (ICRG). The results of both panel data and IV techniques of estimation show that the institutional quality is more relevant for banking sector than for stock market development. Examining the impact of five sub-indicators of the composite ICRG index on financial sector development, we find that some institutional aspects matter more than others do. While law and order are the most relevant determinant of banking sector development, corruption and investment profile are of secondary importance for banking sector development. We also find that, investment profile is the most relevant determinant of stock market development. It has a positive significant effect on market index and stock market liquidity.