Investigating the Effects of Financial Inclusion on Economic Growth: A Generalized Method of Moments and Quantile Approach

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department in Financial Economy, Firouzkooh Branch, Islamic Azad University, Tehran, Iran.

2 Assistant Prof., Department in Financial Economy, Firouzkooh Branch, Islamic Azad University, Tehran, Iran.

3 Associate Prof., Department in Financial Economy, Firouzkooh Branch, Islamic Azad University, Tehran, Iran.

10.22059/frj.2024.368067.1007539

Abstract

Objective
Financial inclusion is a key driver of economic growth. This article examines the impact of financial inclusion on economic growth in middle-income countries. The study measures financial inclusion based on three dimensions: banking penetration, availability of banking services, and usage. Individuals' access to financial instruments seems necessary for financial institutions to expand their market share. However, beyond institutional interests, financial inclusion and universal access to financial markets hold significant importance for policymakers in terms of promoting 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.
Methods
The research employs a quantitative approach and designs a comprehensive financial inclusion index using a generalized method of moments (GMM) and panel data covering the period from 2002 to 2022 across 49 developed countries.
 
Results
Panel data estimates indicate that financial inclusion has a strong, positive, and statistically 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 aligns with the diminishing returns of capital, i.e., 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 hurts economic growth. Population structure (population growth rate) and health system (life expectancy) are also influential factors in economic growth. Therefore, leveraging modern banking tools—such as Internet banking and mobile banking—particularly in underserved areas, along with offering diverse services through bank branches, expanding retail banking, and utilizing user-friendly, accessible applications, plays a pivotal role in advancing and deepening financial inclusion alongside fostering 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.

Keywords

Main Subjects

References

 
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Financial Research Journal
Volume 27, Issue 2
2025
Pages 274-296

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