Financial development and economic growth: Evidence from Pakistan and South Asian economies

This study examines the relationship between domestic bank credit and economic growth across seven South Asian economies: Bangladesh, Bhutan, India, Sri Lanka, the Maldives, Nepal, and Pakistan, from 2001 to 2025. Using a balanced panel of 175 country-year observations from the World Development Indicators, the analysis applies country and year fixed effects and controls for inflation, gross capital formation, and trade openness. The Hausman specification test supports the fixed-effects approach. The results show a negative but statistically insignificant association between domestic bank credit to the private sector and GDP growth, suggesting that the estimated specification does not establish an independent growth relationship. Inflation exhibits a significant negative association with growth, while trade openness shows a positive association with limited statistical support. Gross capital formation is positive but statistically insignificant. Diagnostic tests identify groupwise heteroskedasticity, while wild-cluster bootstrap results are sensitive to the weighting scheme, warranting cautious interpretation given the seven-country sample. The findings underscore the importance of distinguishing credit expansion from its contribution to productive economic activity. The study contributes regional evidence on financial development and growth while highlighting the need for robust inference and further investigation of long-run relationships.