The Contribution of Financial Development in Human Development Index: Empirical Evidence from Sri Lanka.

Abstract

The financial development of a country can be an essential mechanism for enlarging people's preferences in respect of human development, such as a long and healthy life, education, and a decent standard of living. Despite numerous efforts aimed at fostering economic growth and financial inclusion in Sri Lanka, this present study offers a perspective on the relationship between Human Development Index (HDI) and financial development in Sri Lanka over the period 1990-2023, utilizing the Autoregressive Distributed Lag (ARDL) approach. The ARDL approach is appropriate to this study due to its flexibility in handling variables with different orders of integration without requiring all variables to be stationary at the same level. The research explores both short-run and long-run dynamics to understand the role of human capital development in shaping the financial sector. The empirical findings confirm the existence of a long-run equilibrium relationship between HDI and financial development, suggesting that improvements in human development indicators contribute to financial sector growth. Furthermore, the study contributes to the broader discourse on the interplay between human development and financial growth, emphasizing that a well–developed financial sector in turn facilitates further investment in human capital. The findings also suggest that policy measures aimed at enhancing education, healthcare and financial literacy by strengthening regulations can indirectly support financial sector development, creating a more inclusive economic environment to improve the overall quality of life in Sri Lanka.