The impact of financial development on renewable energy consumption in south asian association for regional cooperation (SAARC) countries: A panel data analysis

Abstract

The transition to renewable energy requires financial systems capable of mobilising and directing capital. This study examines financial-sector development and renewable energy adoption in SAARC countries from 2000 to 2024, disaggregating financial development into three channels — banking, equity markets and bond markets — to test whether they affect renewable energy adoption differently. Using a balanced panel of 200 country-year observations, the study applies pooled OLS, fixed-effects and random-effects models, with specification guided by Breusch-Pagan LM and Hausman tests. Results show significant variation across the three dimensions. Banking-sector results are best captured by the fixed-effects specification, under which both indicators of banking-sector depth show a negative, significant relationship with renewable energy use. Bondmarket results diverge: under the random-effects specification, greater bondmarket development is associated with a significant increase in renewable energy consumption. These findings suggest that the three financial channels do not operate uniformly, and that the composition and allocation of financial development — rather than its overall extent — is the more relevant determinant of renewable energy outcomes. The paper concludes by stressing coordinated policy between financial regulators and renewable energy authorities, and suggests that deepening bond markets could advance long-term renewable energy investment.