The purpose of this research is to study the relationship between the banking sector and stock market development. To analyze the relationship between the efficiency of banking sector and the development of stock market this study used the time-series cross-sectional data of 29 countries that have dual-banking systems the data span from 2006 to 2017. This study has investigated the two-way causal relationship between banking efficiency and capital market development by using a two-stage framework. The Output-oriented Data envelopment analysis (DEA) model has been employed in the first stage to estimate the efficiency scores of banking sector with the use of financial ratios. Thereafter, in the second stage, those estimated scores of efficiencies are linked with the level of development of stock markets with the help of the generalized method of moment (GMM) technique. The results demonstrate that the banking efficiency is positively affecting the development level of stock market, in other words, the banking sector contributes to the development of stock markets by giving a positive signal to the outside investors and increasing the investors’ participation in the stock market. The other side of the relationship shows that stock market development has a negative impact on banking sector. Furthermore, results show that investment and GDP positively affect both banking sector and stock market development. Supervisor:- Dr. Atiya Yasmin Javed Co-Supervisor:- Dr. Ahmad Fraz