The Role of Institutional Quality in Financial Development: An Approach towards Emerging Economies

This chapter explores the role and importance of institutional quality in promoting financial development in emerging economies. Institutional quality and financial development are important pillars of sustainable economic growth. The quality of these institutions, which serve as the primary foundations of financial development, is one of the key factors influencing their performance. Socioeconomic, cultural, religious, and corrupt factors are all included in the definition of institutional quality, along with political stability, government effectiveness, the voice of accountability and transparency, as well as internal and external conflicts and their resolutions. The dataset puts together 20 years of annual data between 1999 and 2019 for 26 emerging countries. It draws on a number of data sources: The World Bank FinStats (Feyen, Kibuuka, and Sourrouille, 2014), IMF’s Financial Access Survey, World Governance Indicators, and Bank for International Settlement (BIS) debt securities database We used GMM and 2SLS methods to analyze the behavior of the components of institutional quality including political stability, regulatory quality, rule of law, control over corruption, government effectiveness, and voice and accountability in influencing financial development. It is revealed that there is a direct correlation between financial development and institutional quality. Well-functioning institutions have the capability to promote financial development. Improved institutional standards and governance frameworks have contributed to high rates of financial development in several nations. The components of institutional quality can be improved unit for unit, and this can have a direct and significant effect on financial development. This suggests that stable financial growth is a result of robust institutions. The relationship between the quality of institutions and financial development is unparalleled that emerging markets need to address the issues of the different components such as political stability, regulatory quality, rule of law, control over corruption, government effectiveness, and voice and accountability.