Financial inclusion has taken center stage in the development agenda of countries in their attempts to economically empower their citizens. Financial inclusion involves deliberate measures used to promote access and utilization of services delivered by the financial sector. Broadly, the degree to which financial services are designed to cover the excluded (low income earners or the vulnerable) in an economy is termed “financial inclusion”. Countries, particularly developing economies, over the years have made immense efforts in their quest to broaden the frontiers of financial inclusion. However, some challenges exist with most people still encountering formidable hurdles in their attempt to access mainstream financial services in Africa, leaving many households grappling with financial exclusion. One major development that has widened the net of financial inclusion in Africa is mobile money operations where small and medium enterprises (SMEs), the poor and rural dwellers have been given the platform to financial inclusion.
Financial inclusion widens the frontiers of access to bank accounts and accelerates opportunities for credit acquisition for individuals and entrepreneurs. An effective financial system is also required to provide payment mechanisms, manage risk, and facilitate transactions among economic units. However, some scholars opine that the benefits of financial inclusion resonate in economies with higher net domestic output and productivity, adding that weaker economies hardly enjoy and exhibit the much-touted benefits of financial inclusion. Some researchers have established the downside of financial inclusion, suggesting that an astronomical surge in financial inclusion is a recipe for a future financial crisis. Nevertheless, financial inclusion has been found to boost the liquidity of entrepreneurs, thereby boosting their operational capabilities and leading to the potential creation of job avenues and poverty alleviation.
Following the Maya Declaration for the unbanked in 2011, an initiative by the Alliance for Financial Inclusion (AFI), governments and policymakers have also strengthened their commitments to promoting financial inclusion. International organizations such as the World Bank have also shown profound interest in achieving global financial inclusion. The World Bank’s declaration of achieving global financial inclusion by 2020 is one of its flagship initiatives geared at addressing the canker of financial exclusion. In Sub-Saharan Africa (SSA), most countries have implemented significant financial reforms and interventions to enhance the level of financial inclusion in the region. Aside from the Maya Declaration, other initiatives aimed at promoting financial inclusion in SSA include the Financial Literacy Campaign, the National Financial Inclusion Strategy (NFIS), and policies relating to cashless systems by the respective central banks. Despite these initiatives to create a more financially inclusive sector, it is crucial that the deprived and vulnerable people can easily access financial services offered by financial institutions in the region.
Our study takes a unique approach and contributes to the financial inclusion determinants literature in several ways. First, we investigate how financial globalization affects financial inclusion. Given the overall impact of globalization on the financial system, it is worthwhile to investigate the relationship between financial globalization and financial inclusion. The researchers are unaware of any empirical study addressing this relationship in the African context, and thus present a potential first attempt. Second, we introduce banking sector stability and banking sector profitability as additional potential factors influencing financial inclusion. Moreover, in determining the factors affecting financial inclusion, most prior studies have either used a single measure of financial inclusion or several indicators focusing on one facet of financial inclusion. To deal with the inherent biases and ensure robust results, we construct an index of financial inclusion reflecting the demand-side dimension which describes the usage of financial services, and the supply-side dimension indicating accessibility. Finally, we employ recent data covering 33 Sub-Saharan countries.
The systems theory and the financial literacy theory of financial inclusion are the main theoretical pillars of this study. According to the systems theory of financial inclusion, the outcomes of financial inclusion are accomplished through the functioning of the various existing subsystems. The theory postulates that the sub-systems’ effectiveness will determine whether a national financial inclusion strategy will succeed or fail. In essence, the system theory acknowledges the importance of existing economic, financial, and social systems, as well as their interconnections in fostering financial inclusion. The financial literacy theory asserts that the willingness of individuals to subscribe to financial services offered by the formal financial sector is significantly driven by the level of financial literacy.
The study employs country-level data from 33 Sub-Saharan African countries covering from 2000 to 2017. The data are collected from the International Monetary Fund’s Financial Access Survey, World Bank’s Global Financial Development Database, and the KOF Swiss Economic Institute. Using a dynamic panel approach, our study examines the drivers of financial inclusion in the context of Sub-Saharan Africa (SSA).
Financial inclusion serves as the dependent variable. We construct an index of financial inclusion relying on five sub-measures utilizing the Principal Component Analysis (PCA). The sub-measures include ATMs per 100,000 adults (ATM), operational branches of banks per 100,000 adults (BRA), bank accounts per thousand adults (BAC), customers borrowing from commercial banks per 100,000 adults (BOR), and customers depositing with commercial banks per 100,000 adults (DEP). Financial globalization, banking sector stability, banking sector profitability, economic growth, literacy rate, and rural population are the independent variables in this study. Financial globalization shows how the local financial system is integrated with the global financial markets. The financial globalization index is measured on a scale of 0 to 100. Where a score closer to 100 shows a greater level of financial globalization. Banking sector stability is measured using banks’ z-score. This proxy captures the default possibilities in the banking sector by comparing bank capitalization and returns with returns volatility. We measure economic growth by GDP per capita. The level of income is proxied by the natural logarithm of GDP per capita (in current US dollars). The interpretations of our findings are based on the Generalized Methods of Moment (GMM) estimates.
We discovered that financial globalization and income level of the citizenry are significant drivers of financial inclusion. We also find that economic growth has a profound adverse impact on financial inclusion. The effect of banking sector stability on financial inclusion is positive albeit insignificant. The positive effect of financial globalization on financial inclusion has important policy implications for Sub-Saharan African countries. In this respect, the integration of the local financial system with global financial markets will facilitate efforts to achieve financial inclusion in the region.
This study is published in Economies under MDPI. Details of the study, methods used, findings and practical implications can be found at: https://www.mdpi.com/2227-7099/11/5/146. The following people are the authors of this article: Shani Bashiru, Alhassan Bunyaminu, Ibrahim Nandom Yakubu, , & Mamdouh Abdulaziz Saleh Al-Faryan.
