Natural resources and financial development: The role of institutional quality

This study investigates the natural resource rent and financial development nexus by sub-suming the critical role of institutional quality in this paradigm in a sample of 87 Emergingand Developing Economies (EMDEs), during the period from 1984 to 2018. The findingsdemonstrate that natural resources rent undermines finance and supports the naturalresource curse hypothesis in the financial sector of EMDEs. The institutional quality hasa significant positive impact on finance and it positively moderates the resource-financenexus. We argue that institutional quality follows some channels through which the natu-ral resource curse operates and turns the resource curse into a blessing for the financialsector. Furthermore, the results document a threshold effect of institutional quality inthe resource-finance relationship. Precisely, we find that natural resources rent positivelyexplains finance, once a certain threshold level of institutional quality is attained - belowwhich the natural resources rent becomes a curse, and hinders financial development.Therefore, policy attentions are recommended to promote finance by efficient utilization ofnatural resources through promoting and maintaining institutional quality beyond a certainthreshold level, and incorporating its vital role. Our results are robust to the use of differentsamples, alternative specifications, and alternative measures of finance and institutionalquality, and are practically useful to the policymakers concerned about EMDEs.