We revisit the relationship between financial development and economic growth in a panel of 52 middle-income countries over the 1980-2008 period. Using pooled mean group estimations in a dynamic heterogeneous panel setting, we show that there is an inverted U-shaped relationship between finance and growth in the long-run. In the short run, the relationship is insignificant. This suggests that too much finance can exert a negative influence on growth in middle-income countries. The finding of a non-monotonic effect of financial development on growth is confirmed by estimating a threshold model.

We investigate the effect of financial development on economic growth in the context of an oil-rich economy. In doing so, we allow for the effect of financial development to be different for the oil and non-oil sectors of the economy in the long-run. Using the Autoregressive Distributed Lag (ARDL) bounds test technique; we find that financial development has a positive impact on the growth of the non-oil sector in Saudi Arabia. In contrast, its impact on total GDP growth is negative but insignificant.

This study scrutinises the role of institutional quality in the linkage of financial development and economic growth in 21 Middle East and North African (MENA) countries. Using the common correlated effect mean pooled approach and annual data for the period 1980-2012, we find that not all measures of financial development promote economic growth in the absence of institutional quality, but they all augment growth in the presence of institutional quality. Furthermore, we find that foreign direct investment enhances the growth of MENA countries by the development of financial markets.