The Impact of Financial Inclusion on Financial Growth

Financial inclusion is a critical driver of economic development and its effects can vary with income level. In this research, a comprehensive composite financial inclusion index is constructed and used to test hypotheses developed using heterogeneous robust panel cointegration analysis, GMM modeling and heterogeneous panel causality analysis techniques.

Cost-effectiveness

Financial inclusion can be an essential contributor to economic development, but its implementation must be cost-efficient. To do this effectively requires understanding the needs of poor people and creating products tailored specifically to those needs; telecom infrastructure and customer intelligence may enable FSPs to offer services like savings accounts or loans that benefit customers directly.

An increasing number of studies have analyzed the relationship between financial inclusion and economic growth, yet few empirical tests include control variables to avoid endogeneity issues. To address this limitation, this study uses a dynamic panel data econometric model to estimate its effects on economic growth in low-, middle- and upper middle-income countries, after controlling for other variables. As its results demonstrate, financial inclusion significantly accelerates economic development despite controlling for other variables.

Additionally, the research highlights that having access to an account does not always translate to using it – many accounts remain dormant for long periods of time and therefore a more expansive definition of financial inclusion is needed.

Efficiency

Reaching universal financial access requires safe, efficient and accessible retail payment systems and services – including universal transaction accounts that are widely accessible, affordable and usable, alongside responsible financial products and services – for which CPMI and World Bank Group have published a joint report outlining seven guiding principles to assist countries advance their financial inclusion agendas.

This research investigates the impacts of financial inclusion on economic growth, finding it to be a significant contributor. Furthermore, its effect isn’t linear but depends on factors like income level and regional context; moreover it also examines several control variables including age dependency ratio, inflation rate and population growth rate which it discovered that every 1 increase decreases economic growth by 0.081%.

Accessibility

Financial inclusion is a powerful driver of economic development in low-income communities, particularly through encouraging people to save and invest more, boost business activity, employment opportunities and reduce poverty by opening access to formal economies for women. Yet despite all these advantages of financial inclusion, there remain persistent obstacles preventing its progress such as lack of awareness or cultural norms that distrust formal financial systems, government regulations or regulatory restrictions preventing women from accessing formal economy platforms.

Dumitrescu and Hurlin utilize a panel data set to explore the relationship between financial inclusion and economic growth using a panel data set. Their study controls for various macroeconomic predictors to eliminate any omitted variable bias, and establishes bidirectional causality at 1% significance level between the variables. Their results are robust in full and income-level panels and across regional boundaries; furthermore they provide evidence that credit to the private sector and foreign direct investment also have positive effects on economic growth.

Innovation

Financial inclusion refers to providing everyone with access to affordable and responsible financial services such as payments, savings and credit. CGAP advocates for an inclusive policy framework which prioritizes this aim; however access alone may not suffice as evidenced by Global Findex data showing 20 percent of those with accounts in 2017 were not using them effectively.

Past empirical studies demonstrate the positive influence of financial inclusion on economic growth both short and long term. Unfortunately, existing literature suffers from several limitations, including an insufficient number of comprehensive empirical studies which can provide statistical evidence on these effects as well as comparative results by income level economies that allow policy comparison.