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In the last decade, Arab countries achieved significant progress in financial sector reforms in recognition that economic growth is often associated with increasing financial deepening. In light of these developments, it is important to investigate the relationship between financial development and economic growth. This study applies a model developed by Levine in 1997 using panel data for eleven Arab countries during the period 1980-2001. Then an improved version of a model is applied by adding new four financial indicators in the second stage of the empirical test to measure the effect of public credit ratios on economic growth. We apply a Hausman’s specification test to examine the fixed and random effects in the panel data. Under the application of Levine (1997) model, the results show that all financial indicators are insignificant and do not affect economic growth. The modified model shows that only pubic credit to domestic credit (PUBCR) indicator has a significant and positive effect on economic growth, indicating the dominance of the public sector in economic activities and the financial sectors are still underdevelopment and need more efforts to be able to exert its functions effectively in the Arab countries.
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