Is Human Capital the Hidden Engine Driving Financial Sector Growth? Panel Data Evidence from Developing Economies

Abstract This paper investigates the role of human capital in fostering financial sector development in developing economies, an area that has received limited attention despite the extensive literature on the relationship between human capital and economic growth. The study empirically analyzes data from 28 developing countries over the period 1990–2019, employing FGLS, DOLS, FMOLS, and Driscoll-Kraay estimation techniques for robust results. Causality is assessed using the Dumitrescu-Hurlin bootstrap approach. The findings demonstrate that human capital significantly contributes to long-term financial sector development. Additionally, economic growth, trade openness, and remittances are positively associated with financial sector expansion. The causality analysis reveals bidirectional causality between human capital and financial sector development, as well as between other explanatory variables and financial development. The results suggest that policymakers should prioritize human capital development, alongside strategies to stimulate economic growth, trade openness, and remittance flows, to support financial sector advancement.