Effect of Economic Growth, Human Development, and Governance Factors on Financial Inclusion; A Cross Country Comparative Analysis

Abstract

Financial inclusion is considered as the befitting support to help in economic development. This inclusion’s gaining currency after different researchers and policymakers try to delve into the matter of this inclusion along with its direct and indirect association with the economic and other (external) indicators. To keep in consideration the previous breadth of this inclusion, this paper’s been designed to underscore the pattern of financial inclusion in the developed and developing states along with those macro-economic indicators and other factors that somehow influence this level of inclusion (in any state). This paper examines the effect of economic indicators (GDP, and inflation), human development (HDI), and governance factors (WGI) on financial inclusion. This study undergoes into a comparative analysis for both the developed and developing countries. For this purpose, the data comprises of 37 and 53 developed and developing countries, respectively. This data’s been gathered from Financial Access Survey (IMF), from the year 2008 till 2017, economic variables i.e., GDP and inflation along with the different indexes (HDI and WGI) to determine the level of their influence on this inclusion. With the help of factor analysis through PCA, a single factor’s been determined to envisage the financial inclusion and its association with the macro-economic indicators and indexes. The dynamic panel regression analysis (GMM) has been performed in the context of comparative and collaborative analysis. The results of the t-test of equality of means represent that the high quality institutions strengthen the monetary side of the country and, thus, its level of financial inclusion in comparison to the low quality institutions. Moreover, a high level of HDI provides a certain entry into the financial markets and purely benefit the inclusion to help the state on its economic development. The comparative results indicate that financial inclusion is directly influenced by GDP, HDI, and Governance within the economy, however, inflation does show a negative association with the developed and developing states. Empirical and theoretical evidences suggest that financial inclusion per se doesn’t drive the better economic development but also those external factors that play a vital role in an underlying way to bolster the overall economic and monetary development in any state.