A number of variables are considered for the determination of financial development.

A considerable
number of studies including Huang (2010), Saci and Holden (2008), Beck & Demirguc-Kunt (2009) uses a
number of 11 variables including Deposit money bank assets to GDP ratio, liquid liabilities as a share of
GDP, private credit to GDP, Concentration ratio, return on assets, return on equity, net interest margin,
concentration ratio, cost income ratio and Z-score. Among these variables, considerable number of
variables are also present that can determine the financial development of the country. However, their
use in the same model is restricted because of multi-collinearity in the data (Coban & Topcu, 2013). In
literature of energy- finance nexus, a main methodology used for better determination of the financial
development variable technique named Principal Component Analysis is used. PCA is a modern tool of
multivariate data analysis. It is a method to extract significant information from complex datasets. The
main objective of PCA is to decrease the dimensionality in data. It is a technique that attempts to retain
all the variation available in data even dealing with large set of variables. It transforms the data into new
variables i.e. the principal components and they are not correlated. PCA is normally applied as a method
of variable reduction or for the detection of structure of relationship among the included variables. The
information available in a group of variables is summarized by a number of mutually independent
principal components. Each principal is basically the weighted average of the underlying variables. The
first principal component always has the maximum variance for any of the combination. If more than
one principal component is generated they are uncorrelated. For each principal component the
eigenvalue (variance) indicates the percentage of variation in the total data explained.
However the study of Coban & Topcu (2013) uses the weights obtained from the principal component
analysis and take it as independent variable for each country in the data set, and ranked the countries
on the basis of their mean value.
Results:
Mehrara & Musai (2012) use ARDL approach along with OLS found that financial development is
positively and statistically significant at 1%. Found a cointegrating relationship between electricity
consumption and financial development, furthermore, they can found uni-directional granger cause
relationship between electricity consumption and financial development. These results show that
electricity consumption granger cause financial development.
My Variables of Study:
I can consider the banking approach for measurement of financial development in case of Pakistan. I use
the data of WDI, which contains ratio of liquid liabilities to GDP, Ratio of M2 to GDP, Domestic credit as
% of GDP, Ratio of Domestic Credit Claim on Private Sector to GDP (PRI), Domestic credit provided by
banking sector (% of GDP) as a variables for calculation of financial development. Along with these
variables, electricity consumption in KWH is considered as dependent variable and FDI and real gross per
capita GDP (Local) as independent variable along with financial development.
My aim of Study:
The study on energy finance nexus is quite scare in case of Pakistan. So, I can study the relationship of
electricity consumption and financial development, financial development with FDI and Economic
growth of Pakistan. Sir, in short I want to run a multi variate analysis, in which I can check the effect of
financial development on the electricity consumption and through this relationship define the trend of
FDI and economic growth in the country.
How financial development affect the economic development?
The study on the impact of financial development on economic development of the country is first
discussed by Bagehot (1873), who is of the view that financial development in the market play an
important role in the economic strength through mobilization of income and saving resources. This
concept was further discussed by Schumpeter (1934) by defining the role of financial development
through banking importance in the industrialization of England. Financial development contributes to
economic growth by improving investment through level and efficiency effects. The level effect suggests
that financial sector guide resources from incompetent schemes to profitable ventures. This
transparency in financial markets and reporting system attracts domestic as well as foreign
investment by enhancing investors confidence (Sadorsky, 2010). These indicate that the effect of
financial development on economic growth and thus the energy consumption should be positive.
Variables:
Ratio of M2 to GDP:
Money and quasi money comprise the sum of currency outside banks, demand deposits other than
those of the central government, and the time, savings, and foreign currency deposits of resident
sectors other than the central government. This definition of money supply is frequently called M2; it
corresponds to lines 34 and 35 in the International Monetary Fund's (IMF) International Financial
Statistics (IFS).
Sir, all these variables that I consider in these study having description on WDI and other sides, which
Copy the same description as defined by WDI. Beside this description, I found no pet definition from any
source.