IDEAS home Printed from https://ideas.repec.org/a/plo/pone00/0290511.html

Country-level institutional quality and financial system efficiency: An international evidence

Author

Listed:
  • Mohammed Arshad Khan
  • Muhammad Atif Khan
  • Muhammad Asif Khan
  • Hossam Haddad
  • Nidal Mahmoud Al-Ramahi
  • Noorjahan Sherfudeen

Abstract

The optimum economic outcome of financial system development depends on its level of efficiency. The purpose of this study is to investigate the effect of institutional quality on financial system efficiency. For empirical analysis, we have used a panel dataset of 108 countries from 1996–2020 and employed fixed effect regression and two stages least squares (2SLS) regression methods. The empirical results show that institutional quality has a significant positive effect on financial system efficiency. Particularly all the constituting elements—voice and accountability, political stability and absence of violence, regulatory quality, government effectiveness, rule of law, and control of corruption—of institutional quality are found to have a significant positive impact on financial system efficiency. Moreover, we found that the effect of institutional quality is more pronounced in countries with low-income levels and strong institutional quality. These findings are robust across several robustness tests conducted using additional controls, alternative methodologies, an alternative measure of institutional quality, and financial system efficiency. The results of the study suggest that policy makers should prioritize both enhancing and sustaining institutional quality to promote the efficiency of the financial system, which is crucial for sustainable growth and development.

Suggested Citation

  • Mohammed Arshad Khan & Muhammad Atif Khan & Muhammad Asif Khan & Hossam Haddad & Nidal Mahmoud Al-Ramahi & Noorjahan Sherfudeen, 2023. "Country-level institutional quality and financial system efficiency: An international evidence," PLOS ONE, Public Library of Science, vol. 18(8), pages 1-20, August.
    • Handle: RePEc:plo:pone00:0290511
    DOI: 10.1371/journal.pone.0290511
    as

    Download full text from publisher

    File URL: https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0290511
    Download Restriction: no
    File URL: https://journals.plos.org/plosone/article/file?id=10.1371/journal.pone.0290511&type=printable
    Download Restriction: no
    File URL: https://libkey.io/10.1371/journal.pone.0290511?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Yang, Fan, 2019. "The impact of financial development on economic growth in middle-income countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 74-89.
    2. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    3. Rasidah Mohd-Rashid & Waqas Mehmood & Chai-Aun Ooi & Siti Zakiah Che Man & Chui Zi Ong, 2022. "Strengthened rule of law to reduce corruption: evidence from Asia-Pacific countries," Journal of Money Laundering Control, Emerald Group Publishing Limited, vol. 26(5), pages 989-1006, August.
    4. Egbendewe, Aklesso Y.G. & Oloufade, Djoulassi K., 2020. "Good institutions and banking sector competitiveness: A semi-parametric evidence," Finance Research Letters, Elsevier, vol. 36(C).
    5. Hasan, Iftekhar & Koetter, Michael & Wedow, Michael, 2009. "Regional growth and finance in Europe: Is there a quality effect of bank efficiency?," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1446-1453, August.
    6. Sharma, Chandan & Paramati, Sudharshan Reddy, 2022. "Resource curse versus resource blessing: New evidence from resource capital data," Energy Economics, Elsevier, vol. 115(C).
    7. Cooray, Arusha, 2011. "The role of the government in financial sector development," Economic Modelling, Elsevier, vol. 28(3), pages 928-938, May.
    8. Diallo, Boubacar, 2018. "Bank efficiency and industry growth during financial crises," Economic Modelling, Elsevier, vol. 68(C), pages 11-22.
    9. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    10. Xulan Yu & Miao Li & Shuting Huang, 2017. "Financial Functions and Financial Development in China: A Spatial Effect Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(9), pages 2052-2062, September.
    11. Ongo Nkoa, Bruno Emmanuel & Song, Jacques Simon, 2020. "Does institutional quality affect financial inclusion in Africa? A panel data analysis," Economic Systems, Elsevier, vol. 44(4).
    12. Navaz Naghavi & Wee-Yeap Lau, 2016. "Financial Liberalization and Stock Market Efficiency: Causality Analysis of Emerging Markets," Global Economic Review, Taylor & Francis Journals, vol. 45(4), pages 359-379, October.
    13. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    14. Knack, Steve & Xu, Lixin Colin, 2017. "Unbundling institutions for external finance: Worldwide firm-level evidence," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 215-232.
    15. Lensink, Robert & Meesters, Aljar & Naaborg, Ilko, 2008. "Bank efficiency and foreign ownership: Do good institutions matter?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 834-844, May.
    16. Khan, Muhammad Atif & Gu, Lulu & Khan, Muhammad Asif & Oláh, Judit, 2020. "Natural resources and financial development: The role of institutional quality," Journal of Multinational Financial Management, Elsevier, vol. 56(C).
    17. Bibi, Uzma & Balli, Hatice Ozer & Matthews, Claire D. & Tripe, David W.L., 2018. "Impact of gender and governance on microfinance efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 307-319.
    18. Khan, Muhammad Atif & Gu, Lulu & Khan, Muhammad Asif & Bhatti, Muhammad Ishaq, 2022. "Institutional perspective of financial sector development: A multidimensional assessment," Economic Systems, Elsevier, vol. 46(4).
    19. Atif Mian, 2006. "Distance Constraints: The Limits of Foreign Lending in Poor Economies," Journal of Finance, American Finance Association, vol. 61(3), pages 1465-1505, June.
    20. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
    21. Joshua Aizenman & Yothin Jinjarak & Donghyun Park, 2015. "Financial Development and Output Growth in Developing Asia and Latin America: A Comparative Sectoral Analysis," NBER Working Papers 20917, National Bureau of Economic Research, Inc.
    22. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
    23. Zeqiraj, Veton & Sohag, Kazi & Hammoudeh, Shawkat, 2022. "Financial inclusion in developing countries: Do quality institutions matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    24. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
    25. Hatra Voghouei & M. Azali & Mohammad Ali Jamali, 2011. "A survey of the determinants of financial development," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 25(2), pages 1-20, November.
    26. repec:eme:mfppss:v:35:y:2009:i:2:p:107-127 is not listed on IDEAS
    27. Young-Jin Ro & In-Chul Kim & Jin Woong Kim, 2017. "Financial Development and Investment in Korea," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(3), pages 534-543, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Protap Kumar Ghosh & Fakarudin Kamarudin & Saira Kharuddin, 2026. "Country’s regulatory system and non-performing loans: moderating effect of country’s income level," Economic Change and Restructuring, Springer, vol. 59(2), pages 1-27, April.
    2. Mohd Alsaleh & A. S. Abdul-Rahim & Long qi & Yuan Yuan, 2026. "Evolution through intellectual property rights in the aquaculture sector: reshaping aquaculture production networks," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 28(3), pages 6439-6466, March.
    3. Cortes Quiñonez, Juan Camilo & Cabezas, Stefania Cielo, 2025. "Análisis macroeconómico e institucional del riesgo de crédito en el sector agrícola de los países en desarrollo [Credit risk in the agricultural sector: an agricultural economics analysis using panel data]," MPRA Paper 128675, University Library of Munich, Germany.
    4. Michael Appiah & Emmanuel Baffour Gyau & Bright Akwasi Gyamfi & Simplice A. Asongu, 2025. "Balancing the Financial Trilemma: The Role of Financial Integration and Financial Development in Achieving Sustainable Development in Sub‐Saharan Africa," Sustainable Development, John Wiley & Sons, Ltd., vol. 33(6), pages 8274-8293, December.
    5. Mohd Alsaleh & Xiaohui Wang & Zhang Nan, 2025. "Evaluating the Potential of Information and Communication Technologies to Increase Aquaculture Sustainability," Sustainable Development, John Wiley & Sons, Ltd., vol. 33(3), pages 3663-3680, June.
    6. Xiao, Biyun & Li, Haibo, 2025. "Financial efficiency, green innovation and green total factor productivity," Finance Research Letters, Elsevier, vol. 76(C).
    7. Xiaohui Wang & Mohd Alsaleh & Zhang Nan, 2025. "Rapid Growth in Greenhouse Gas Emissions from the Adoption of Industrial-Scale Aquaculture: The Pathway Towards a Blue Economy," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(3), pages 13284-13309, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Khan, Muhammad Atif & Gu, Lulu & Khan, Muhammad Asif & Bhatti, Muhammad Ishaq, 2022. "Institutional perspective of financial sector development: A multidimensional assessment," Economic Systems, Elsevier, vol. 46(4).
    2. Chris Doucouliagos & Jakob de Haan & Jan-Egbert Sturm, 2022. "What drives financial development? A Meta-regression analysis [A new database of financial reforms]," Oxford Economic Papers, Oxford University Press, vol. 74(3), pages 840-868.
    3. Xixi Li & Jiajun Yang & Ning Zeng, 2024. "Natural resource rent and inclusive finance: an institutional perspective," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-29, April.
    4. Khan, Mohammed Arshad & Khan, Muhammad Atif & Khan, Muhammad Asif & Alhumoudi, Hamad & Haddad, Hossam, 2023. "Natural resource rents and access to finance," Journal of Multinational Financial Management, Elsevier, vol. 70.
    5. Nazima Ellahi & Adiqa Kausar Kiani & Muhammad Awais & Hina Affandi & Rabia Saghir & Sarah Qaim, 2021. "Investigating the Institutional Determinants of Financial Development: Empirical Evidence From SAARC Countries," SAGE Open, , vol. 11(2), pages 21582440211, April.
    6. Fernanda Cigainski Lisbinski & Heloisa Lee Burnquist, 2024. "Institutions and financial development: Comparative analysis of developed and developing economies," EconomiA, Emerald Group Publishing Limited, vol. 25(2), pages 347-376, May.
    7. Jun Qian & Philip E. Strahan, 2007. "How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans," Journal of Finance, American Finance Association, vol. 62(6), pages 2803-2834, December.
    8. James R. Brown & Gustav Martinsson & Bruce C. Petersen, 2013. "Law, Stock Markets, and Innovation," Journal of Finance, American Finance Association, vol. 68(4), pages 1517-1549, August.
    9. Zouheir Abida & Imen Mohamed Sghaier & Nahed Zghidi, 2015. "Financial Development and Economic Growth: Evidence from North African Countries," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 2, pages 17-33, April.
    10. Thorsten Beck, 2013. "Finance, growth and fragility: the role of government," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 49-77.
    11. Olufemi Adewale Aluko & Bolanle Aminah Azeez, 2019. "Effectiveness of legal institutions in stock market development in sub-Saharan Africa," Economic Change and Restructuring, Springer, vol. 52(4), pages 439-451, November.
    12. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    13. Arfia Aman & Muhammad Asif Khan & Mohammed Arshad Khan & Ahsanuddin Haider & Judit Oláh & Veronika Fenyves, 2023. "Role of institutions in promoting finance in emerging markets: A panel data analysis," PLOS ONE, Public Library of Science, vol. 18(3), pages 1-26, March.
    14. Ketteni, Elena & Kottaridi, Constantina, 2019. "Credit market deregulation and economic growth: Further insights using a marginal integration approach," Journal of Macroeconomics, Elsevier, vol. 62(C).
    15. Robert Lensink & Aljar Meesters, 2014. "Institutions and Bank Performance: A Stochastic Frontier Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(1), pages 67-92, February.
    16. Mathur, Ike & Marcelin, Isaac, 2015. "Institutional failure or market failure?," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 266-280.
    17. Alquist, Ron & Chabot, Benjamin R. & Yamarthy, Ram, 2022. "The price of property rights: Institutions, finance, and economic growth," Journal of International Economics, Elsevier, vol. 137(C).
    18. Leopoldo Fergusson, 2006. "Institutions for Financial Development: What are they and where do they come from?," Journal of Economic Surveys, Wiley Blackwell, vol. 20(1), pages 27-70, February.
    19. Effiong, Ekpeno, 2015. "Financial Development, Institutions and Economic Growth: Evidence from Sub-Saharan Africa," MPRA Paper 66085, University Library of Munich, Germany.
    20. Casey, Gregory & Klemp, Marc, 2021. "Historical instruments and contemporary endogenous regressors," Journal of Development Economics, Elsevier, vol. 149(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:plo:pone00:0290511. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: plosone (email available below). General contact details of provider: https://journals.plos.org/plosone/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.