This paper investigates the effect of institutional quality on the financeegrowth nexus. To this end, an empirical model with linear interaction between financial development and institutional quality is estimated. Our main findings show that, while most indicators of financial development have a significantly negative effect on economic growth, the sign of the coefficients of interaction variables are significantly positive. This provides strong evidence that institutional quality mitigates the negative effect of financial development on economic growth. Looking to the subcomponents of our institutional index, our findings show a development of the banking sector in a country with an important score in Law and Order, Bureaucracy and Investment Profile facilitate growth. Also, countries, with an important score of investment profile, can benefit from stock market development in terms of economic growth. These results suggest that, in order to benefit from financial development, financial systems in MENA countries must be embedded within a sound institutional framework.

This paper provides new evidence on the influence of macroeconomic environment and institutional quality on stock market development, using data from 14 MENA countries over the period of 1990-2007. Using both panel data and instrumental variable techniques, we found that income level, saving rate, stock market liquidity, and interest rate influence stock market development with the expected theoretical signs. Our results also showed that the banking and the stock market sectors are complementary instead of being substitutes. We found that the institutional environment as captured by a composite policy risk index does not appear to be a driving force for the stock market capitalization in the region. Our last results are robust to different specifications and empirical techniques.

Purpose – The purpose of this paper is to compare the effects of Islamic financial development and conventional financial development on the economic growth for five GCC countries (Bahrain, Kuwait, Qatar Saudi Arabia and UAE). Design/methodology/approach – Using generalized least squares, OLS and panel data frameworks, this paper employs different measures of financial development for the period (1996-2011). Findings – Empirical results strongly support the hypothesis that Islamic finance leads to growth in the five GCC countries, however, no significant relationship observed between conventional financial development and growth. Practical implications – The findings of this paper suggest the need to accelerate the financial reforms for Islamic finance that have been launched in the region since the last decade and to improve the efficiency of these countries’ Islamic financial systems to stimulate saving/investment and, consequently, long-term economic growth. Originality/value – This study has several contributions to the existing literature. To the best of the authors’ knowledge, this paper is the first study that examines empirically the effect of Islamic finance on economic growth in GCC countries. As well, this paper is the first to compare the different effects of Islamic finance and conventional finance on economic growth on a context of countries having the most developed Islamic financial system in the world operating side-by-side with a conventional financial system.

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