The positive effects of financial development on economic growth have encouraged researchers to study the determinants of financial development. Based on the theoretical and empirical studies undertaken, institutions, openness of trade and financial markets, legal tradition, and political economy are identified as factors promoting the financial system. Of these, political economy factors, which can have both direct and indirect effects through other determinants, could be considered the most influential factors in financial development. Variations in the political economy of countries could well explain variations in their financial development. Although all studies show the significant effects of these determinants on financial development, further research is needed to assess the impact of each determinant and the policies that could best promote financial development.

The study examines the effect of economic institutions on financial development, where economic institutions themselves are endogenous and determined by political power. Following the theory of “economic institution” proposed by Acemoglu et al. (2004), two groups of political power (de jure political power or political institution and de facto political power or distribution of resource) are employed in the analysis. By using the panel data of sixty counties during 1980–2006, the empirical results show that political power is a statistically significant determinant of economic institutions and hence affects the development of financial systems. The result demonstrates that de jure political power has great significant effect on financial development than de facto political power.

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