employment perspective and find that SMEs that borrow repeatedly from BRAC manage to generate more employment.

The finance-growth nexus suggests that the growth effects of finance operate through either capital accumulation or productivity growth. The findings presented in this section provide yet another mechanism, employment growth. Unfortunately, this literature is still in its infancy and more research is necessary to test a variety of hypotheses using a multitude of empirical methodologies.

# **4. Determinants of Financial Sector Development**

The preceding sections have shown that various components of financial sector development have significant positive effects on economic growth and employment. In this section, we are interested in distilling main messages from the established literature to answer a crucial question: what are the determinants of financial sector development in general and each component in particular? We restrict the aim of this section to gathering as much empirical evidence as possible that links _policy_ variables to financial sector development. Within these policy variables, the focus is set primarily on regulations, supervision, and the enabling institutional environment. In setting this restriction, we refrain from investigating historical legal determinants over which policy makers have no control.<sup>26</sup> As in Section 2, we investigate the determinants of financial sector development by focusing on a component in each of the following four subsections. Each subsection starts by discussing how regulations and supervision affect financial sector development and then moves to other determinants such as the institutional and legal environment (e.g., creditor protection and credit registries, among others) financial openness and banking reforms, financial structure (i.e., concentration and competition), ownership of banks (i.e., government or foreign ownership), and finally engagement with the World Bank and the International Monetary Fund. In table 13, panels A–E present empirical results for determinants of each component.

Before starting with the empirical evidence, some general remarks will be useful. First, it is only recently that academic researchers have managed to get their hands on data related to regulation and supervision. Although some papers use author-constructed indexes (e.g., compliance with the Basel Core Principles or Regulatory Governance Index based on Financial Sector Assessment Program), the majority of this literature relies on data collected by Barth, Caprio, and Levine (2000). The most recent literature review by Levine (2012) provides very important insights regarding the effects of regulatory framework on financial sector development. The common finding in the literature is that each component of financial sector development is positively related with the following key regulatory factors:

> 26 Note, however, that the institutional determinants listed later in this subsection are endogenous to legal origins. Beck, DemirgucKunt, and Levine (2001) offer an excellent review of legal theories and conduct empirical tests on various channels through which legal origins affect financial sector development. For a critical review of the literature, also see Beck and Levine (2005).

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