Does financial inclusion enhance economic growth? Empirical evidence from the IsDB member countries

Abstract

AbstractThis innovative study examines the effect of financial inclusion measured by financial inclusion index (FII) on the economic growth of the Islamic Development Bank (IsDB) member countries. The data were collected on different elements of financial inclusion and economic growth for the period 2000–2016. To draw multi‐dimensional results, we have set up the panel data for 45 countries, and we estimated the generalized method of moments (GMM), two‐stage least squares (2SLS), panel vector autoregressive (VAR) and panel Granger causality tests. Based on the results of dynamic panel estimations, we find that FII has a positive effect on economic growth. The findings of Granger causality analysis reveals a bi‐directional causality of FII indicators with economic growth and a unidirectional causality between the FII and economic growth. Therefore, it suggests that the financial inclusion index has a positive effect on the economic growth in IsDB member countries. These findings recommend that the policymakers should consider financial inclusion as a driver of the economic growth in the long run. The empirical findings have useful policy insights for the IsDB member countries.