A Meta-Analysis of the Relationship Between Financial Inclusion and Economic Development
In the last two decades, there has been much discussion about the impact of financial inclusion on the economic development of nations. This paper provides a meta-analysis of some existing literature on the relationship between financial inclusion and economic development to present researchers in the field of study with an insightful summary of approaches adopted by researchers and the findings of their work. It divides the review into studies that concluded a unidirectional relationship between financial inclusion and economic development and those that found otherwise. It then discusses the studies’ methodologies to identify their gaps and recommends dimensions further studies in the field should consider.
The relationship between financial inclusion and economic development of countries has been gaining increasing attention of scholars in the fields of development economics and development finance since the emergence of the twenty-first century. Before the last two decades, scholars focused on the relationship between broader financial development and countries’ economic growth. Financial development is a more general concept that measures how an economy’s financial service sector has overcome costs incurred in the financial system, enhancing the ease of financial transactions. On the other hand, financial inclusion, a relatively new frontier in financial development, measures equitable access to financial services by the population of an economy regardless of their position in the economic pyramid.
Financial transactions aid economic activities in every economy, and a reduction in transaction costs, or a decrease in resource use per transaction, increases economic growth and economic welfare (Bywaters & Mlodkowski, 2012). In many underdeveloped countries, those at the bottom of the economic pyramid are often excluded from financial services. In other words, the cost of financial transactions for those at the bottom of the economic pyramid is often higher than those at the different locations, thereby excluding these vulnerable individuals and households from equitable access to financial services required to aid their economic prosperity. As a result, many research works have investigated the correlation between the financial inclusion rates and economic development levels of countries with diverse findings.
The diverse findings of the existing works of literature motivate this paper to review them to provide scholars in the field with a summary and perspectives of past studies in the area of research and identify directions for further studies. It does this in the following sections by categorizing them in line with the nature of their findings. The two broad categories are those that conclude that financial inclusion has a unidirectional positive impact on economic development and those that find that financial inclusion does not have a one-way positive effect on economic growth. The paper provides brief perspectives on the relationship between the variables as explained by the various studies.
Financial inclusion Has Unidirectional Positive Impact on Economic Development
Andrianaivo and Kpodar (2011) investigated how mobile telephone penetration and use improve financial inclusion and economic growth. The study examined the relationship between mobile telephone use, financial inclusion, and economic enhancement. They discovered that mobile telephone penetration improves financial inclusion and positively impacts economic growth. A significant fallout of their study is that high mobile penetration enhances deposit mobilization and access to credit. The mobile telephone serves as a unique identifier in some situations and enhances the assessment of consumption patterns in others. Similarly, mobile devices facilitate quality information flows, reduce information asymmetry for depositors and financial intermediaries, improve information acquisition of both depositors and financial institutions, and enhance monitoring from both sides of the market. It concludes that higher mobile penetration reduces the cost of financial transactions and improves access (Andrianaivo and Kpodar, 2011, as cited in Bello, 2022).
Yorulmaz (2012) studied the relationship between financial inclusion and economic development by examining Turkey and European Union countries. It found that financial inclusion positively correlates with human development and economic growth and submits that an advanced financial system enhances economic growth at the macroeconomic level. The study further explained that human development and income measured by GDP per capita are essential factors determining the financial inclusion level in an economy. Furthermore, it submits that the unemployment rate and rural population factors negatively correlate with financial inclusion in an economy, concluding that the higher the employment rate, the higher the financial inclusion (Yorulmaz, 2012, as cited in Bello, 2022).
Hariharan and Marktanner (2012) estimated the impact of financial inclusion on economic growth within the framework of the Solow growth model. The widespread assumption that the exclusion of a large population from access to mainstream financial services was a primary limitation to development incited the study. It found that a 10 percent increase in financial inclusion can increase income per worker on average by 1.34 percent. Consequently, it recommended that economies improve their financial inclusion levels because it was yet an unutilized tool for economic growth and development with the capacity to boost productivity and grow capital accumulation and allocation as a vital factor of production (Hariharan and Marktanner, 2012, as cited in Bello, 2022).
Migap et al. (2015) examined the potential impact of financial inclusion on inclusive growth in Nigeria. Using inclusive growth indicators, it discovered that financial inclusion is necessary for inclusive growth in Nigeria. It concluded that for Nigeria to sustainably experience economic development by reducing poverty’s debilitating impact on economic development, the government should create and continually enhance collaboration between financial intermediaries and other stakeholders to support critical sectors, including the financially excluded. The paper further advised governments to intentionally direct capital flow to the bottom of the pyramid while investing in infrastructures required to improve the standard of living (Migap, Okwanya, and Ojeka, 2015, as cited in Bello, 2022).
Park and Mercado (2015) investigated the impact of financial inclusion on poverty and income inequality. It discovered that financial inclusion considerably lowers poverty and reduces income inequality in Asian developing countries. It further noted that per-capita income (PCI) and population size enhance inclusive finance rate, while the high dependency age ratio of the population hampers financial inclusion. The study shows a strong association between financial inclusion and poverty reduction and recommended that policymakers promote and implement policies addressing financial access inhibitors. It pointed the attention to microfinance, which makes credit and other financial services accessible to low-income people, enabling them to engage in economic activities and smoothen their consumption patterns when confronted with economic adversities. It recommended that governments promote the financial inclusion of those at the bottom of the economic pyramid to address the continually expanding income inequality (Park and Mercado, 2015, as cited in Bello, 2022).
Kim (2015) examined whether financial inclusion positively affects economic growth by reducing income inequality. It employed access to finance as a proxy for financial inclusion and Gross Domestic Product (GDP) growth as a proxy for economic development. It observed that income inequality has a negative association with GDP growth. The paper also found that the negative correlation between the two variables was significant in underdeveloped and highly vulnerable countries and concluded that financial inclusion lowers income inequality and induces economic growth (Kim, 2015, as cited in Bello, 2022).
Onaolapo (2015) investigated the impacts of inclusive finance on the economic growth of Nigeria between 1982 and 2012. It confirmed a positive association between financial inclusion in Nigeria as an independent variable and poverty reduction and economic growth as dependent variables throughout the study period. It suggests that financial inclusion has a positive and noteworthy impact on the economic advancement of Nigeria (Onaolapo, 2015, as cited in Bello, 2022).
Similar to Onaolapo (2015), Babajide et al. (2015) examined the relevance of financial inclusion on economic growth in Nigeria to identify the factors that induce financial inclusion and its implications on economic growth. Using secondary data sources and an advanced statistical model, it noted that financial inclusion induces production and capital per worker, which invariably determines economic output. It proposes that doubling financial inclusion can have a tremendous favorable implication on economic development, provided that other political and socio-economic factors remain the same (Babajide, Adegboye & Omankhanlen, 2015, as cited in Bello, 2022).
Inoue and Hamori (2016) investigated the relationship between financial access as a proxy of financial inclusion and the economic development of African countries. The research methodology involved using longitudinal data of thirty-seven countries in Sub-Saharan Africa between 2004 and 2012 to ascertain the impact of improved financial access on economic growth in the continent. The result indicated that financial access induced Sub-Saharan Africa’s economic growth and development, concluding that the higher the availability of financial services in Sub-Saharan Africa, the higher the economic growth (Inoue and Hamori, 2016, as cited in Bello, 2022).
Rasheed et al. (2016) examined the relationship between financial inclusion and financial development using panel data from Ninety-Seven (97) countries. The paper found that the financial inclusion rate is significantly and positively associated with financial sector development, and the Gross Domestic Product per capita positively correlates with financial growth. It concluded that by enhancing financial inclusion, an economy experiences economic development (Rasheed, Law, Chin & Habibullah, 2016, as cited in Bello, 2022).
Ganti and Acharya (2017) observed that financial inclusion as a supply leading strategy of the financial development model could accelerate economic growth. The study showed that financial inclusion as a supply-leading strategy induces improved output than a demand-following model and that financial inclusion induces accelerated economic growth. Also, it found that financial inclusion is a potent component of the supply-leading financial development strategy as it makes access and usage of financial services possible for those excluded and makes them economically productive (Ganti and Acharya, 2017, as cited in Bello, 2022).
Kim et al. (2017), in the paper entitled “Financial Inclusion and Economic Growth in the Organization of Islamic Countries (OIC),” examined the relationship between financial inclusion and economic growth in the Organization of Islamic Cooperation countries. Using longitudinal data of 55 OIC, the paper observed that financial inclusion is positively associated with economic growth. The result suggests that financial inclusion positively impacts economic growth, and financial inclusion and economic growth have identical effects. It concluded that there is a positive relationship between financial inclusion and economic development in OIC countries (Kim, Yu & Hassan, 2017, as cited in Bello, 2022).
Lenka and Sharma (2017) investigated how financial inclusion affected India’s economic growth between 1980 and 2014. The paper employed the annual time series data of financial inclusion and economic growth barometers in its analysis. It noted that financial inclusion is positively associated with economic growth, surmising that financial liberalization policies targeting improving access to financial services induced India’s economic development (Lenka and Sharma, 2017, as cited in Bello, 2022).
Sethi & Acharya (2018) assessed the effect of financial inclusion on the economic growth of some developed and developing countries. The study employed some panel data models and panel causality tests of financial inclusion data obtained from Sarma (2012) for 2004 to 2010 to ascertain the long-run relationship between financial inclusion and economic growth. It observed a positive and long-run relationship between financial inclusion and economic development. It also discovered bi-directional causality between financial inclusion and economic growth, confirming that financial inclusion drives economic growth (Sethi & Acharya, 2018, as cited by Bello, 2022).
Malhotra (2020) investigated the relationship between financial inclusion and economic growth for seven emerging Asian economies from 2010 to 2018 due to the few cross-country studies in the field in Asian countries despite efforts to enhance financial inclusion. The paper found a significant positive relationship between financial inclusion and economic growth, noting that financial technology (fintech) significantly improved financial inclusion. Consequently, it advised emerging economies to enhance financial technology and encourage traditional financial institutions to embrace and collaborate with financial technology innovations (Malhotra, 2020, as cited by Bello, 2022).
Barik and Lenka (2021) reviewed financial inclusion’s role in reducing poverty in India’s Twenty-Eight (28) states between 1993 and 2015. It observed a striking negative correlation between financial inclusion and poverty, explaining that financial inclusion reduces poverty and induces economic development. It concluded that financial inclusion is necessary to achieve economic advancement and that states with a higher financial inclusion ratio have lower poverty and vice versa (Barik & Lenka, 2021, as cited by Bello, 2022).
Financial Inclusion Does Not Have Unidirectional Positive Effects on Economic Development
Despite the overwhelming studies concluding that financial inclusion is positively associated with economic growth consistently, some papers concluded otherwise. While some found that financial inclusion does not always induce economic growth and development, others concluded that there is obscurity in the direction of causality between inclusive finance and growth. Yet, others stated that the relationship is overly exaggerated. This subsection reviews a few of such works.
Sharma (2016) assessed the association between financial inclusion and economic development of the Indian economy by subjecting the indicators of financial inclusion and economic development from 2004 to 2013 to statistical analysis. It found a positive association between economic growth and financial inclusion’s various measurement dimensions. The study observes a dual and almost equal causality between some dimensions of financial inclusion and GDP, meaning that one can cause the other (Sharma, 2016, as cited by Bello, 2022).
At the regional level, Gouréne and Mendy (2019) investigated the relationship between financial inclusion and economic growth in the West African Economic and Monetary Union (WAEMU) between 2006 and 2015 to observe which induced the other at different periods. The study found no causal relationship between economic growth and financial inclusion between the first two to four years of the data set examined. However, there was a bi-directional causal relationship between economic growth and financial inclusion between four and eight years of the data set. It further revealed that using financial services (demand) results in more economic growth than the demographic penetration of financial services (supply). On the other hand, economic growth induces higher penetration of financial services than using financial services. It concluded that causality between the variables depends on the period because there is no causal relationship between financial inclusion and economic growth in the short run but bi-directional causality in the medium to long run. Notably, this study aligns with some studies, such as Adedokun and Aga (2020), that the causal effect between financial inclusion and economic development depends on time frame (Gourene & Mendy, 2019, as cited by Bello, 2022).
From a country perspective, Anane (2019) investigated the causal relationship between financial inclusion and economic growth in Ghana. It adopted a different approach from many other studies by employing quarterly time series data from 2005 to 2016 instead of annual data. The study found mixed results and obscured causal direction between financial inclusion and economic growth barometers, concluding that the order of inducement depends on the parameters used to measure the variables. As a result, it recommends that policymakers carefully select the financial inclusion indicators to develop toward achieving economic growth and development (Anane, 2019, as cited by Bello, 2022).
Like Gouréne and Mendy (2019), Adedokun & Aga (2020) investigated the relationship between financial inclusion and economic growth at a regional level by studying Sub Sahara African countries between 2004 and 2017. Notably, the study harmonized the various dimensions of financial inclusion into a single index. The results confirm that financial inclusion significantly correlates with economic growth in Sub Sahara Africa. It also observed that economic growth caused financial inclusion in the short run, agreeing with Gouréne and Mendy (2019) that the causal relationship is time-sensitive (Adedokun & Aga, 2020, as cited by Bello, 2022).
Like Park and Mercado (2015), Ratnawati (2020) examined the impact of financial inclusion on the economic growth of some Asian countries by observing its specific effects on poverty, income inequality, and financial stability. The research used the three acclaimed dimensions of financial inclusion as the independent variable. On the other hand, it employed the poverty ratio below the national poverty line and the Gini coefficient as poverty and income inequality parameters, respectively. It found that all three dimensions of financial stability significantly impact economic growth, poverty, income inequality, and financial stability. However, it observed the partial effect of the financial inclusion dimension on economic development, poverty alleviation, income inequality, and financial stability in ten Asian countries to be insignificant. It concluded that while financial inclusion positively affects economic growth through poverty alleviation, income inequality reduction, and financial stability in many Asian countries, not all dimensions of financial inclusion significantly impact economic development (Ratnawati, 2020, as cited by Bello, 2022).
Like Yorulmaz (2012), Thathsarani et al. (2021) investigated how financial inclusion interacts with human development. The study approached its investigation using secondary data from eight South Asia countries from 2004 to 2018. Identical to Adedokun & Aga (2020), it developed a financial inclusion index to harmonize principal components of the variables’ indicators. It found evidence that financial institution development causes human capital development in South Asian countries in the long run but not in the short run. It then reached a similar conclusion as Adedokun & Aga (2020) and Thathsarani (2020) that economic growth has no relationship with financial inclusion in the long run. Still, it does in the short-run (Thathsarani, Wei & Samaraweera, 2021, as cited by Bello, 2022).
The financial inclusion – economic growth nexus has been a topical issue since the turn of the twenty-first century. Many underdeveloped countries in Africa, Asia, and Latin America continue to make little or no progress in improving the socio-economic well-being of their people. Interestingly, the stagnancy in the socio-economic situation of these countries continues despite so many discussions on the matter. As a result, many researchers have tested the potency of financial inclusion to drive economic development using diverse methods and approaches, and their findings have equally varied.
The studies reviewed above can be classified based on the study sample and research approach employed. One category is those that used national and regional data in their studies, while the other is those that explained specifically how financial inclusion positively impacts growth. At the national level, Migap et al. (2015) and Onaolapo (2015) found a significant positive correlation between proxies of financial inclusion and inclusive growth in Nigeria as it improved production. On the regional and continental horizon, Park & Mercado (2015) observed that financial inclusion reduces poverty and income inequality, positively inducing Asia growth. Furthermore, Inoue & Hamori (2016) noted that financial inclusion positively impacts growth in Africa. In a related development, Kim et al. (2017) observed that financial inclusion positively affects economic growth in Organization of Islamic Cooperation (OIC) countries. On a more international scene, Rasheed et al. (2016) and Sethi & Acharya (2018) showed that financial inclusion positively correlates with economic growth across countries.
Park & Mercado (2015) and Barik & Lenka (2021) showed that access to financial services lowers poverty and income inequality. Similarly, Kim (2015) explained how inclusive finance reduces income inequality and enhances economic growth. Likewise, Babajide et al. (2015) showed that financial inclusion improves production and output significantly, thereby inducing the economic development of nations. Relatedly, Andrianaivo & Kpador (2011) discovered that the mobile telephone enables financial inclusion and enhances economic growth. Kumar & Sharma (2017) observed that policies that promote financial inclusion contributed to the economic development of India.
Most literature confirms a significant positive correlation between financial inclusion and economic development. However, there is no consensus on the theory in a similar manner as the discordant conclusions of studies in the broader financial development and financial inclusion nexus. For example, Adedokun & Aga (2020) and Thathsarani (2020) explained that one of the variables could cause the other, depending on the length of time. Similarly, Sharma (2016) observed bi-directional causality between financial inclusion and growth when testing some indicators and unidirectional causality in others.
Gouréne & Mandy (2019) and Anane (2019) discovered no causality and mixed causality in the relationship between the variables in more extreme scenarios. Gouréne & Mandy (2019) noted that there is no association between the variables during the initial years and bi-directional causality in later years of the study, agreeing with Adedokun & Aga (2020) and Thathsarani (2020) on the time-sensitivity of the direction of inducement. Similarly, Anane (2019) described mixed results and no correlation in all measurement indicators, explaining that the relationship depends on the parameters used to measure the variables.
For many reasons, the lack of agreement and consensus on the hypothesis justifies further study in the field. Furthermore, each research has at least a gap that requires filling by other pieces of work.
Recommendation for Further Studies
While some of the literature reviewed in this paper did not mention the need for further study to fill specific gaps in their work in explicit terms, some did. For example, Yorulmaz (2012) recommended the extension of the financial inclusion index for future research to achieve more robust results. Even those that did not explicitly recommend gaps that require filling by future works, this review identifies these areas that need further research.
In addition to Yorulmaz’s call for further studies, many studies in the field found a unidirectional relationship between financial inclusion and growth. Regardless, this meta-analysis justifies further investigation of the hypothesis that financial inclusion induces growth based on the conflicting views of Sharma (2016), Anane (2019), Gourene & Mendy (2019), Adedokun & Aga (2020), and Thathsarani et al. (2021). Likewise, Ratnawati (2020) submitted that financial inclusion parameters have an insignificant effect on economic growth and its indicators in some countries, giving a basis for further investigation of the widely acclaimed correlation between financial inclusion and economic development.
Moreover, some of the studies, such as Andrianaivo and Kpodar (2011), Migap et al. (2015), Park and Mercado (2015), Onaolapo (2015), Babajide et al. (2015), Kim et al. (2017), Lenka and Sharma (2017) and Malhorta (2020) are limited in scope. As noted earlier in this analysis, some focused on a single country, while others concluded by studying a few countries within a region. These countries are too few to surmise that the outcomes apply to all countries across regions and continents. Consequently, future studies need to close this gap by broadening the scope and expanding the study area to accommodate the diverse regions and continents.
Financial inclusion has at least three broad dimensions: access, usage, and quality (Global Partnership for Financial Inclusion, n.d). Similarly, the United Nations Committee for Development Policy often uses three dimensions to measure economic development: income, human assets, and economic/environmental vulnerability (The Least Developed Countries Report 2021, 2021). However, much of the existing literature did not consider all the dimensions of financial inclusion and the three categories of economic development measurements in their assessments. This restricted consideration of financial inclusion and economic development dimensions could have skewed the research findings.
Kim (2015) used one aspect of the financial inclusion measurement, access. Similarly, Hariharan and Marktanner (2012) relied on the World Bank Development Indicator database, which employed GDP and GNI to estimate economic development. While the study used one of the three aspects of economic development indicators, income, it completely ignored the financial inclusion indicators in its estimation. Instead, it simulated the expected impact of an increase in the independent variable (financial inclusion) on the dependent variable (economic development). Furthermore, Inoue and Hamori (2016) employed one of the three dimensions of financial inclusion, access to financial services, in their study.
Similarly, the financial inclusion indicators employed by Rasheed et al. (2016), domestic credit to the private sector, is often associated with the broader financial sector development concept, including financial inclusion as a subset. It requires a narrowing focus on inclusive finance indicators that measure access and depth for more dependable results. Also, Barik & Lenka (2021) acknowledged that a significant limitation of their study was its use of limited financial inclusion indicators to construct a financial inclusion index as a proxy of financial inclusion. It recommended that future studies focus more closely on financial inclusion indicators, such as microfinance and insurance.
Most of the literature on the topic confirms the hypothesis that financial inclusion induces the growth and development of economies. Those that reject the view found exceptions that the direction of causality is not always one-way. Some dissenting views found bi-directional causality depending on the length of time of the data panel. Only in a few cases, such as Gouréne & Mandy (2019) and Anane (2019), did studies propose no association between financial inclusion and economic development levels of countries.
Notably, these works of literature indicate the need to further study the relationship between the two variables by adopting different approaches to close the abovementioned gaps. These gaps include expansion of the study samples across continents and regions to mitigate potential error of hasty generalization, such as in Andrianaivo and Kpodar (2011), Migap et al. (2015), Park and Mercado (2015), Onaolapo (2015), Babajide et al. (2015), Kim et al. (2017), Lenka and Sharma (2017) and Malhorta (2020).
It is equally vital for future studies to incorporate all the measurement dimensions of financial inclusion and economic development to enrich their findings and conclusions. The Global Partnership for Financial Inclusion and the United Nations Committee for Development Policy provide the full dimensions of financial inclusion and economic development, respectively. Such an all-encompassing approach will resolve the limitations of Kim (2015), Hariharan & Marktanner (2012), Inoue & Hamori (2016), and Barik and Lenka (2021) discussed earlier. The various invalidation of findings by previous researchers and divergent conclusions in the cases of Sharma (2016), Anane (2019), Gourene & Mendy (2019), Adedokun & Aga (2020), and Thathsarani et al. (2021) requires that future works independently examine the subject and contribute to the body of knowledge in the field, as suggested by much of the literature.
Further research into the relationship between financial inclusion and economic growth is a worthy endeavor for development finance and economics scholars. The continued challenge of poverty and poor human assets index in the Least Developed Countries (LDCs) should motivate such work to find a sustainable solution to the menace and its derivatives, including the most challenging problems the world currently faces. The numerous studies that propose that financial development significantly induces growth should incite more research from diverse approaches. These studies should aim at closing the gaps identified in this analysis.
Suppose new studies confirm the alternative hypothesis that financial inclusion induces economic development and reject its null form. In that case, they will prove that underdeveloped economies and bilateral development agencies should focus on improving their financial inclusion indicators to enhance the standard of living. On the other hand, they may reject the alternative form of the hypothesis that financial inclusion induces growth and development and accept its null form. Then, they will provide economic managers and development-focused bodies like the World Bank and the United Nations with insight to seek other development accelerators to solve economic advancement challenges.
Author: Kolawole A. Bello
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