The literature on financial development and economic growth nexus is replete with empirical studies that approximate financial development with private sector credit-to-GDP as the conventional measure. However, this indicator only captures the depth aspect of financial development. The main contribution of this paper is to extend the index constructed by the International Monetary Fund in 2016 by including the stability dimension of financial development and thus, construct a multi-dimensional index for the Philippines.
Using principal components analysis (PCA) to derive weights for 38 variables, we construct indices that quantify the extent of development in financial institutions and markets with respect to access, depth, efficiency, and stability. Our findings provide evidence that access, depth, efficiency, and stability are distinct dimensions of financial development and thus, necessary analytical tools to facilitate the analysis of pinning down likely sources of fragilities in the Philippine financial system. We also find that both financial institutions and markets have progressed and developed through time even amid the global pandemic. We note that the BSP’s timely policy responses to ensure ample liquidity in the system have mitigated the potential adverse impacts of the health crisis on the financial sector.