Financial Development and Economic Growth Relationship: An Analysis with Credit Based Financial Index

Countries are classified under different group names because of their similarity to each other, and they are analyzed in that way by various international organizations. BRICS, MENA, G7 and Fragile Five are well known group names. In this study, the relationship between financial development and economic growth for Fragile five countries (Brazil, India, Indonesia, South Africa and Turkey) through the period of 2002-2016 were examined using annual data. In emerging market economies, businesses prefer to meet their financing needs by asking for credit from the capital market, mostly from banks and non-bank financial institutions. Therefore, it would not be wrong to say that financial system of Fragile Five countries is based on “lending financial institutions”. Within the framework of the analysis, financial development index which includes three data related with credit provided by banks and financial institutions, and national income per capita as an economic growth variable were taken into account. Panel co-integration, VECM, DOLS and FMOLS tests have revealed the existence of a unidirectional causality relation from growth towards financial development.