SQLite stores all data in a single file.
The directory you provide must be writable by the webserver during installation.
It should not be accessible via the web; this is why we're not putting it where your PHP files are.
The installer will write a .htaccess file along with it, but if that fails someone can gain access to your raw database.
That includes raw user data (email addresses, hashed passwords) as well as deleted revisions and other restricted data on the wiki.
Consider putting the database somewhere else altogether, for example in /var/lib/mediawiki/yourwiki.