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

Abstract

In this study, the relationship between financial development and economic growth in BRICS economies is analyzed over the time range 1995-2025. The paper, based on endogenous growth theory, financial intermediation theory, and institutional economics, examines the impacts of capital formation, labour force participation, research and development, and domestic credit supply to the private sector on the dynamics of economic growth. The method used is quantitative, using panel data analysis, descriptive statistics, correlation analysis, and a panel unit root test for data validity. Empirical estimation is done under both fixed effects and random effects models, and the Hausman test is performed to verify the superiority of the fixed effects specification in controlling for unobserved heterogeneity and ensuring consistent estimation. The empirical results indicate that gross fixed capital formation and employment participation, as well as research and development, have positive and statistically significant impacts on economic growth, suggesting that investment, labor utilization, and innovation play crucial roles in improving productive capacity and long-term economic performance. Domestic credit to the private sector, on the other hand, has a negative and statistically significant relationship with economic growth, which indicates the inefficiency of financial intermediation and a “too much finance” hypothesis. The findings suggest that the over-crediting or misallocation of credit could have negative implications on growth because of financial instability and the misallocation of resources. The overall findings of the study highlight that the conventional growth factors like investment and labour, as well as innovation, are still important, but the impact of financial development is significantly associated with institutional quality and efficient credit allocation. The results of the study have significant policy implications, highlighting the importance of enhanced financial regulation, better institutional structures, and greater productive investment for sustainable economic growth in emerging economies.