Measuring the comprehensive index of financial inclusion and the effects of economic growth: GMM and Quantile approach

Objective: Financial inclusion is a socio-economic challenge for policy makers, markets and financial institutions. Financial inclusion is the driver of economic growth. In this article, the effect of financial inclusion on economic growth in middle-income countries was evaluated. In this study, financial inclusion was calculated by considering the three dimensions of banking penetration, availability of banking services, and usage. People's access to financial instruments seems necessary for financial institutions to expand their market share. Despite this, financial inclusion and access of all people to financial markets is very important for policymakers from the aspects of economic development. Therefore, the purpose of this article is to first design a comprehensive index of financial inclusion and then evaluate its effects on economic growth in developing countries.



Method: The research employs a quantitative approach and designs a comprehensive financial inclusion index using a generalized method of moments (GMM) and panel data for the period 2002-2022 across 49 developed countries.



Findings: Panel data estimates indicate that financial inclusion has a strong positive and significant impact on the economic growth of these countries. The effect of the Financial Inclusion Index (IFI) on economic growth is stable regardless of the estimation method (fixed effects, random effects, and generalized method of moments), showing consistent effectiveness. The multi-country estimation suggests that the impact of IFI on economic growth is higher in countries with lower income compared to higher-income countries, indicating that IFI can be a suitable stimulus for the economic growth of poorer countries. This result aligns with the diminishing returns of capital, meaning that establishing banking infrastructure and deepening financial inclusion have more pronounced effects in the early stages and gradually diminish over time. The findings also show that macroeconomic factors (inflation rate, economic openness, and capital formation) have a positive impact, while the unemployment rate has a negative effect on economic growth. Population structure (population growth rate) and health system (life expectancy) are also influential factors in economic growth. Therefore, leveraging new banking tools such as Internet banking and mobile banking, especially in less privileged areas, providing diverse services through branches, expanding retail banking, utilizing simple and people-friendly applications, play a central role in the development and deepening of financial inclusion along with economic growth. It should be noted that the average inflation rate is about 6% and these countries rarely experience rapid and double-digit inflation.



Conclusion: The results of the multi-country estimation indicate that the financial inclusion index has a significant impact on economic growth. Except for the economic openness variable, the results of this method are consistent and compatible with the generalized method of moments. The multi-country estimates suggest that the effectiveness of the financial inclusion index is greater in countries with lower income. Therefore, deepening and developing financial inclusion is crucial for countries with lower income and can contribute to economic prosperity.