Political freedom and financial inclusion: Unraveling social trust and political rent-seeking

Abstract

This paper delves into the role of political rights in shaping financial inclusion. Despite the acknowledged significance of political institutions in influencing financial systems, there remains limited understanding of the economic origins of the impact of political institutions on financial inclusion. Utilizing data from the 2021 Global Findex database, the study finds that weak political rights significantly reduce the likelihood of individuals possessing financial accounts and using digital financial services. Robustness tests employing an instrumental variable and the difference-in-differences framework confirm that inadequate political rights have a detrimental effect on financial inclusion. By exploring the reasons for financial exclusion and moderating factors, this study provides supportive evidence for the mechanisms of eroded social trust and political rent-seeking as the key constraints that hinder inclusiveness in providing mainstream financial products and services.