Natural resources income can serve as the foundation for the economic growth and development of countries in various ways. Based on the current empirical evidences from different countries, it is evident that financial development represents one of the conduits through which economic growth and development can be achieved, especially in the context of natural resources income. In this study, we investigate the relationship between financial development and natural resource rent, examining the hypothesis of the “Financial Resource Curse”. This examination is conducted separately within the domains of the banking system, the stock market, and the whole financial system in both Iran and Iraq. The study covers the period from 1990 to 2021 and utilizes annual data sourced from the World Bank. Our analysis employs Autoregressive Distributed Lags (ARDL) and Non-linear Autoregressive Distributed Lags (NARDL) models to estimate the relationships between these variables. Additionally, the Dynamic Ordinary Least Squares (DOLS) estimator is employed to ensure the robustness of our results. Our findings reveal a notable, negative, and statistically significant effect of resource rent on the development of Iraq's banking sector and the whole of financial system. This outcome lends support to the hypothesis of the financial resource curse within these sectors in Iraq during the examined period. However, the relationship between resource rent and the stock market development index does not yield statistically significant results, making it difficult to make conclusions regarding the existence of the financial resource curse in the stock market. The effect of the natural resources’ abundance on the total index of financial development in the long term in Iran is positive but not statistically significant. Therefore, the hypothesis of blessing of financial resources in Iran is not confirmed. Furthermore, the enhancement of institutional quality in Iraq has had a positive and statistically significant impact on financial development within both the banking and stock market sectors of Iraq during the period under review. The Corruption Index also demonstrates a positive and statistically significant effect on the development of the banking sector, supporting the hypothesis of "grease in the wheels of the machine." However, it exerts a negative impact on the development of the stock market and the financial system. According to the estimation of NARDL model in Iran Economy, the impact of positive shocks caused by natural resources on the banking development index is greater than negative shocks. The effect of institutional quality on banking development index, stock market development index and total financial development index is positive and significant in the long term and indicates that the strengthening the institutions can be effective on the efficient and appropriate use of natural resources in the financial development of the country. Considering the results of the research and the effects of the spillover effects of revenues from natural resources on economic growth and financial development in Iran as an oil exporter country, making proper policy in this field seems very necessary. In this regard, reviewing the experience of successful countries such as Norway and Botswana can be useful for policy making. In conclusion, this study provides valuable insights into the relationships between natural resource income and financial development within Iraq and Iran. Our findings support the financial resources curse hypothesis in Iraq's banking sector and financial system. However, the evidence does not allow us to draw definitive conclusions regarding the stock market. Additionally, the positive effects of institutional quality improvements are highlighted, especially in the banking and stock market sectors in Iraq. The influence of the Corruption Index is noted, suggesting both positive and negative impacts within the sectors, which underlines the importance of addressing corruption in the specific domains.
