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Optimal performance of an economic system depends on the presence of efficient, strong, and supplementary real and financial sectors. Working together of them is necessary and sufficient condition for the survival of the economic system in general. This study aims to explain the impact of transaction cost on financial development for OPEC members during 1990-2012. In the present study, the effect of transaction costs on financial development is estimated by an econometric model according to Baltagi et al (2007). In this regard, the index of the banking sector efficiency (private credits) is used to explore the development of the banking sector, and stock market turnover ratio (in percent) and Total Value (of shares) Traded (TVT)/GDP (in percent) is used to study the development of the non-banking sector. Explanatory variables include the transaction costs, the government size, the per capita income, and degree of openness of economy. The estimation results using Panel Data indicate that the transaction costs affect financial development significantly; and the reduced transaction costs result in increasing financial development. With regard to property rights, we conclude that guaranteed property rights raise the financial development. Also, per capita income and government size have positive and negative relationships with financial development, respectively.

Keywords: Transaction Cost, Financial Development, Panel Data, OPEC

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