Does governance quality matter for the development of financial institutions in Pakistan?

Abstract

PurposeGovernance quality has been a dominant factor to formulate policies for the development of financial institutions in the world. Therefore, this study aims to explore the impact of governance quality on financial institutions along with globalization in the case of Pakistan.Design/methodology/approachTime series data from 1996 to 2018 are considered for analysis. The NG-Perron is applied to check the order of integration. In addition, Kim and Perron (2009) structural break unit root test is used to identify break years. The autoregressive distributive lags (ARDL) bound testing approach is used to detect the long-run association among governance quality, financial institutions and globalization.FindingsThe results of unit root analysis show that all series are stationary at a different level of integration, I(0)/I(1). However, the long-run association is detected in the presence of break years. The authors find a positive impact of governance quality to determine financial institutions in the long-short-run. Similarly, globalization also enhances financial institutions but only in long run.Originality/valueThis study fills the gap in the economic literature by exploring the linkages between the financial institution and disaggregated governance indicators in the case of Pakistan. Moreover, a role of structural break is also captured during analysis. This study also opens some new insights for policymaking.