EXTENDED ABSTRACT
INTRODUCTION:
Considering the importance of financial development in the economic growth and development of countries, examining the factors affecting the development of the financial sector is of great importance for policy makers and researchers. Of course, financial development has different dimensions that all those dimensions should be considered. Therefore, the present study was conducted in order to investigate the key factors affecting the financial development of countries.
In intercountry reviews, factors such as free trade, quality of institutions, economic freedom, economic stability, legal framework, human development, political stability, inflation, economic growth, etc. have been identified as the most important determinants of financial development (Cherif & Dreger, 2016; Ibrahim & Sare, 2018; Khalfaoui, 2015; Law & Habibullah, 2009; Anwar et al, 2017)). But it seems that the risks of the economic and financial sector can make the financing and financial development process face obstacles, which has been less noticed in previous studies. The importance of economic and financial risks will be greater especially in developing countries and in countries that are more exposed to such risks. Macroeconomic uncertainties impede optimal economic performance(Shabani et al, 2025).
Asian countries are under various national risks. East Asian countries are exposed to a variety of economic risks, such as oil price changes, currency price changes, foreign debt, interest rates and money supply, given their heavy dependence on international trade and foreign energy sources (Verma & Verma, 2014; Cevik et al, 2014). On the other hand, the countries of West Asia and the Middle East with all kinds of risks are dependence on oil prices, dependence on the growth of industrialized countries, political instability, political risks, terrorist attacks, etc., which make the economic environment and the financial sector as well as foreign direct investment uncertain. faces many (Spulbar et al, 2022; Bayar & Gavriletea, 2018). Of course, it can be said that there is a deep economic dependence between the economies of West and East Asia. West Asian countries are mostly suppliers of energy and raw materials for the industries of East Asian countries, and therefore it seems that the uncertainties and changes in the economic environment of Asian countries can affect each other. Therefore, it can be expected that economic and financial risks will spread between these countries. Financial development in one country can lead to positive effects such as economic growth in neighboring communities if there are extensive economic contexts and relationships with other countries (Minh & Ngoc, 2023). Differences in governments’ fiscal and budgetary policies can also moderate or exacerbate the spatial effects of risks, particularly in countries with procyclical fiscal policies, where public expenditure, by absorbing liquidity from financial markets, weakens the capacity for financial intermediation(jafari & Fatholahi, 2026). Access to financial resources can also extend to neighboring regions, and on the contrary, due to the difference in the economic regulations and policies of the two countries, there may be no possibility of cash flow between the two regions (Yu and Huang, 2023).
Therefore, the present study aims to investigate the impact of economic and financial risks and other determining factors on financial development in Asian countries. In this study, the multidimensional index of financial development, which shows all three dimensions of depth, efficiency and access of financial institutions and markets, has been used. Also, the spatial approach has been used to investigate the contagion and overflow of variables between neighboring countries. The results of this research lead to the expansion of the literature in this field and provide new evidence of the relationships of these variables.
 
METHODOLOGY:
In examining some economic and macroeconomic relations of the country, the variables may have spatial effects. in such a way that the effects of that variable spread beyond the borders of a region. In these cases, it is possible to use methods that can include the spatial dimension in statistical estimations and inferences. According to the panel regression approach of the present study, spatial panel regression approaches can be used for modeling and estimation of models. When there are spatial effects between variables, they can be explained under the titles of spatial dependence or spatial autocorrelation and spatial heterogeneity or spatial structure. The general form of the regression equation for spatial panel data will be the following equation.

                                      

 
where i and t represent cross section and time respectively, Y is an vector of the dependent variable and X is an  vector of independent variables, W is the spatial weight matrix of the dependent variable  and E is the matrix of error sentences (Elhorst, 2010).
So far, no study has been conducted to investigate the effect of financial risk and political risk on the multidimensional index of financial development, and most studies have investigated the relationship between financial risk and political risk. Therefore, to model research from studies that have focused on identifying the main determinants of financial development, such as Lee et al.'s studies (2016), Anwar et al. Zain-al-Din and Nur-al-Din (2017) and Cherif and Dargar (2016) are used. Generally, in these studies, the degree of economic openness, the quality of governance, the atmosphere governing the economy, the abundance of resources and geography have been identified as the most important factors determining financial development. Therefore, the present study model is considered with a spatial approach as follows:

 

In this equation, FD is the combined financial development index, Finriskrank is the financial risk rating and Ecrieskrank is the political risk rating, Lgdpperc is the logarithm of per capita income at constant prices, Open is the degree of economic openness, Governance, Good Governance Index, Natsource, Natural Resources Rent and finally E_W due to the large difference between the political structure, Economic and geopolitical countries of East and West Asia, this virtual variable is considered to separate two groups of countries. The sample examined in this study is the countries of the Asian continent during the period of 2000-2021.
 
FINDINGS:
Estimation results for both financial risk and economic risk models are reported in the Table 1 The number of countries surveyed is 31 and the volume of data is 682.
 
Table 1. Estimation of financial risk and economic risk models by SDM method
Source: Research results




 


Financial risk model


Economic risk model




Variable


Coef


t


Coef


t




Finriskrank


0.0091


7.88^*


 


 




Ecriskrank


 


 


0.0029


4.8^*




Lgdpperc


0.0456


7.83^*


0.066


10.66^*




Open


0.0011


10.65^*


0.0013


8.8^*




Natsource


-0.0035


-5.82^*


-0.0026


-7.26^*




Governance


0.0021


4.36^*


0.0014


4.22^*




E_W


0.0721


5.22^*


0.108


8.13^*




 


 


 


 


 




Wlx_ Finriskrank


0.0007


2.5^**


 


 




Wlx_ Ecriskrank


 


 


0.0009


3.1^*




Wlx_ Lgdpperc


0.0104


4.01^*


0.0021


1.56




Wlx_ Open


-0.0002


-3.2^*


-0.0003


-4.17^*




Wlx_ Natsource


-0.0005


-2.6^*


0.0003


1.71^***




Wlx_ Governance


-0.0002


-0.64


-0.0004


-2.09^**




Wlx_ E_W


0.0302


4.10^*


0.0302


3.48^*




_cons


-0.7078


-13.9^*


-0.4515


-9.70^*




 


 


 


 


 




Rho1


0.179


8.2


0.084


4.16




Sigma


0.026


3.04


0.036


0.011




Wald test(Rho1=0)     67.24 (P-value>Chi2(1)  0.0)


Wald test(Rho1=0)      67.24 (P-value>Chi2(1)  0.0)




F-test: 382                 Wald-test: 4589


F-test: 1662           Wald-test: 19950




R2:  0.94             R2 Adj: 0.94   


R2: 0.98                  R2 Adj: 0.98   




Cross number:   31                                               Sample size: 682
*, ** and *** are significant at the level of 1%, 5% and 10%, respectively.
 




The results show that financial risk and economic risk both significantly reduce financial development (considering that financial risk and political risk data are ranked and lower ranks mean more risks and high ranks mean The meaning of risk is less and therefore the variable coefficient is interpreted with this point in mind). The financial and economic risk rating coefficients are 0.0091 and 0.0029, respectively, and are significant at the 99% confidence level. On the other hand, according to the Rho coefficient in both models, it can be said that financial development also has spatial and neighborhood effects. That is, financial development in a country has improved this index in the neighboring country as well. This result is probably due to trade relations and exchanges and even economic competition between the two neighboring countries.
As expected, per capita income has had a positive and significant impact on the financial development of countries. The coefficient of this variable in the model of financial risk and economic risk is 0.0456 and 0.066, respectively, and it is significant at the 99% confidence level. Per capita income is a proxy of the macroeconomic situation and is actually representative of a wide range of economic variables. Therefore, economic prosperity will naturally lead to the development of financial markets and improvement of public finance. The growth of production in a country increases the demand for attracting financial resources. The principle of economic acceleration also has a concept close to this issue. Therefore, when production, consumption and as a result economic competition increases, investors will pressure banks to obtain credit. In such a situation, policy makers respond to the demand for resources and encourage more financial facilities to ensure economic growth. Therefore, it can be expected that in this situation, financial institutions will be more active and financial indicators will improve.
But another variable is the degree of openness of the economy, which in the current study had a positive and significant effect on financial development in the countries under review. In the business process, the level of production of goods and services extends to wider markets. As the sales markets of a product expand on a wider level, the need for more investment and increased production scale is felt. In this situation, companies and producers will need more financial resources. On the contrary, being limited to domestic markets requires far less financial resources, and countries with a more closed economy will have fewer production lines and a smaller production scale. This is true even in the matter of imports. Also, the economies that operate at the international level have a higher level of competitiveness. Competition leads to improved efficiency and productivity in the use of financial and non-financial resources, and as a result, financial indicators in such economies experience higher levels. Also, the significance of the spatial effect of economic openness on financial development confirms the previous claim. The trade of two neighboring countries leads to the improvement of the financial indicators of both countries.
One of the important results of this research is the effect of natural resource rent on the financial development index. The coefficient of this variable was -0.0035 and it was significant at the confidence level of 99%. This means that countries that have had more natural resources have not been successful in financial development. It may seem at first glance that the existence of natural resources can create more resources for investors through financial markets, but the research results show that the existence of natural resources has reduced the need for financing from the banking system. This result can have many reasons. According to theories of resources and economic growth, such as the resource disaster theory, the abundance of natural resources weakens the governance structure and economic efficiency. Therefore, when countries with natural resources experience lower economic growth and lower efficiency, it can be expected that the level of financial development in these countries will be lower. However, the present study shows that countries with more natural resources have lower levels of financial market development. But the point that should be noted in this case is the positive spatial effect of abundant resources on the financial development of neighboring countries. This means that the presence of larger natural resources in the neighboring country can improve the financial institutions and financing structure in the target country. Probably, this result was due to economic competition or access to natural resources of neighboring countries.
Good governance index is another effective variable on financial development. This index has been used in many studies examining the determinants of financial development. This variable is created from the average of 6 WGI indicators regarding good governance indicators. Good governance index has a positive and significant effect on financial development in both financial risk and political risk models. When corruption in an economy is controlled and the quality of government regulations is high and political stability and the accountability environment are improved, the conditions for economic and financial activities become more favorable and therefore we can expect the development of institutions and financial markets. Financial institutions can be directly and indirectly related to political institutions. Efficient political institutions will support efficient financial institutions.
Finally, due to the great difference in the political, economic and geopolitical structure of East Asian and West Asian countries, especially in the discussion of political risk, the need for a virtual variable in the model has been necessary to separate and examine this difference. Therefore, the East-West virtual variable was added to the model and the number 1 was considered for East Asian countries and zero for West Asian countries. The coefficient of this variable indicates that East Asian countries have better financial markets. Countries such as Japan, South Korea and Singapore are leading countries in financial development. Political tensions in East Asia are less than in West Asia, and this issue creates many differences between the countries of the two regions. This variable has an effect on financial development even spatially; In fact, this coefficient confirms the above claim that the presence of a country in East Asia leads to the improvement of financial development indicators.
 
CONCLUSION
The results showed that financial and economic risks had a negative and significant impact on the combined index of financial development in the countries in question. Also, the spatial effect of financial and economic risks has also had a negative impact on the development index in neighboring countries. Investing in the shadow of risk and uncertainty faces many fears, and therefore, in countries where the economic environment and financial markets experience higher risks, they have lower levels of domestic and foreign investment. Another important point that should be of interest to the macro-policymakers of the Communities is the cross-border effects of financial and economic risks. This means that financial and economic uncertainties can spread to neighboring countries, and therefore this shows the regional nature of these risks. Therefore, participation and regional agreements to reduce financial and economic risks for the economic development of countries are among the emphasized items of this study. The creation of a safe and stable regional zone will cause contagion and convergence of economic and financial development components. 
As the results of the research showed, the degree of openness of the economy and the extent of trade lead to activities in wider markets, which also require more financing. Exposing the economy to competition leads to greater efficiency not only in the issue of productivity and technical knowledge, but also in financial institutions. In such a situation, the financial institutions of a country are forced to improve their performance and efficiency in order not to fall behind the competition of economic competition. Of course, many financial institutions and financial markets today operate at the international level, and open economies will be closer to the standards of global markets because they will enjoy smart and stronger global financial services.
The results of this research showed that countries with more natural resources have not been able to make optimal use of these resources. Geographically, most of the rich countries are located in West Asia from the point of view of natural resources. Oil-rich countries and countries that have very rich mines. But countries such as Japan and South Korea and Southeast Asian countries often do not have rich energy and natural resources. But financial development, contrary to the availability of these resources, is at a higher level in East Asian countries. The financial institutions of these countries have more depth and efficiency and perform better in economic financing. Therefore, the policy recommendation of this study is to change the way countries benefit from their natural resources.
Also, improving indicators of good governance creates a more suitable environment for the development and deepening of financial institutions and markets. In countries with higher levels of corruption and weak government regulation and the absence of an accountability mechanism, financial institutions are not properly developed and strengthened. Economic resources will not be properly directed to the productive and public activities of investors, but will be diverted from the healthy financial process in the process of occurrence of rents. Therefore, improving government regulations, political stability, controlling corruption and holding statesmen accountable are among the recommendations emphasized in this study.
Finally, one of the most important results of the present research indicated that both financial development and economic and financial risks have spatial and proximity effects, and therefore the changes of these variables in a country overflow and spread to neighboring countries. But the results of this research showed that financial development in a country can be effective and positive for the financial development of neighboring countries. Also, economic and financial risks in a country strongly affect and weaken financial development in neighboring countries. Therefore, these results have an important recommendation that regional cooperation is needed to improve financial development and reduce the consequences of economic and financial risks. Creating economic and financial cooperation organizations, creating trade corridors, establishing common support laws, creating common financial systems and judicial cooperation can improve financial development and reduce the effects of economic and financial sector risks in Asian countries.