Iranian Journal of Trade Studies

Iranian Journal of Trade Studies

The Impact of Globalization on Financial Development in Selected (OIC) Member Countries

Document Type : Research Paper

Authors
Abolfazl Shahabadi 1
zahra khosravi 2
1 Professor, Department of Economics,, Faculty of Social Science and Economics,, Alzahra University,, Tehran< Iran
2 M.A in Economic Development and Planning, Department of Economics, Faculty of Social Science and Economics, Alzahra University, Tehran, Iran,
10.22034/ijts.2026.2078465.4218
Abstract
In recent decades, globalization has emerged as a major force shaping the structure of financial systems in developing economies. However, an important question remains as to whether the effect of globalization on financial development is uniform across different levels of globalization or exhibits a nonlinear, threshold-dependent pattern. This study aims to address this issue by examining the nonlinear effects of globalization on financial development in 53 selected member countries of the Organization of Islamic Cooperation (OIC) over the period 2004–2022, using a Panel Smooth Transition Regression (PSTR) model with a single transition function (m = 1). In this framework, the KOF composite globalization index is employed as the transition variable, while financial development is proxied by the ratio of private sector credit to GDP. The estimation results provide strong evidence of a statistically significant nonlinear relationship characterized by a two-regime structure. Specifically, globalization exerts a positive and significant effect on financial development in the first regime, when the level of globalization is below the estimated threshold of 82.5. Beyond this threshold, the effect of globalization becomes negative and significant, indicating an inverted U-shaped relationship between globalization and financial development. The estimated transition slope parameter (γ = 0.43) suggests a relatively rapid shift between regimes. Furthermore, inflation and government size negatively affect financial development in both regimes, whereas democracy and GDP per capita have a positive and significant impact only in the low-globalization regime. Overall, the findings highlight the importance of gradual globalization strategies, macroeconomic stability, and institutional strengthening as essential prerequisites for fostering sustainable financial deepening across OIC member countries.
Keywords
Globalization
Financial Development
Inflation
Democracy
Government Size

Subjects

 
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  • Receive Date 21 November 2025
  • Revise Date 06 January 2026
  • Accept Date 02 February 2026