Financial Intermediation, Institutional Quality, and Economic Growth: Insights from BRICS Nations

Abstract

This study examines the relationship between financial development and economic growth in BRICS economies, over the period from 1995 to 2025. Grounded in endogenous growth theory, financial intermediation theory, and institutional economics, the study evaluates how capital formation, employment participation, research and development, and domestic credit to the private sector influence economic growth dynamics. A quantitative panel data approach is employed, incorporating descriptive statistics, correlation analysis, and panel unit root tests to ensure data validity. The empirical estimation is conducted using both fixed effects and random effects models, with the Hausman test confirming the superiority of the fixed effects specification in addressing unobserved heterogeneity and ensuring consistent estimates. The empirical findings reveal that gross fixed capital formation, employment participation, and research and development exert positive and statistically significant effects on economic growth, highlighting the importance of investment, labor utilization, and innovation in enhancing productive capacity and long-term economic performance. In contrast, domestic credit to the private sector exhibits a negative and significant relationship with economic growth, suggesting inefficiencies in financial intermediation and supporting the “too much finance” hypothesis. The results indicate that excessive or poorly allocated credit may hinder growth by promoting resource misallocation and financial instability. Overall, the study underscores that while traditional growth drivers such as investment, labor, and innovation remain crucial, the effectiveness of financial development is highly dependent on institutional quality and efficient credit allocation. The findings provide important policy implications, emphasizing the need for strengthening financial regulation, improving institutional frameworks, and promoting productive investment to ensure that financial development contributes positively to sustainable economic growth in emerging economies.