This study is aimed to examine the effect of financial liberalization (FL) and financial development (FD) on economic growth, individually and jointly. This study uses the data of 58 countries (27 DC’s and 31 LDC’s), from the period 1973 to 2012, by applying the method of Panel Cointegration. This study involves the FL index made of six multi-dimensions of banking sector reforms which are not used in the literature till now. The estimation results found that LDC’s showed more positively significant response to FL and FD than DC’s, individually and jointly in regressions. Moreover, too much liberalization harms the economic growth rate, especially in DC’s, but not for LDC’s. This is because LDC’s still have the capacity to absorb the beneficial consequences of introducing financial reforms in their banking sector. Similarly, the credit boom to private sector (which is taken as indicator of FD) inversely affect the economic growth rate. Such relation can be caused by lack of credit recovery, more defaulting loans, insolvency, and huge public debt that hence leads to a financial crash as that of 2008 financial crisis. Furthermore, the foreign banks entry is found to have ambiguous effects on economic growth rate. On one hand it has positively significant effect on economic growth rate with positive FL while with negatively affecting FD. This can be due to too much competition among the banks, which leads to financial distress. On other hand it negatively but insignificantly affecting the economic growth rate, which can be due to too much competition among the banks that leads to financial distress. But FD comes with positive sign because of enhancing efficiency due to competition among the banks Supervisor:- Dr. Shahid Mansoor Hashmi