Shadow economy in Africa: how relevant is financial inclusion?

Abstract

PurposeThis study aims to investigate the possible relationship between financial inclusion and shadow economy in selected African countries.Design/methodology/approachThe study uses panel data estimation technique and Toda and Yamamoto causality approach. The data of selected African counties over a period of 2005–2015 are sourced from World Bank Development Indicators, International Monetary Fund International Financial statistics database and International Country Risk Guide.FindingsThe results show that financial inclusion reduces the size of shadow economy. The causality results show that there is a unidirectional causality moving from financial inclusion to shadow economy. The results demonstrate that a country with lower level of corruption and higher level of growth can benefit more in reducing the size of shadow economy through financial inclusion.Originality/valueThis study provides the first evidence of the link between financial inclusion and shadow economy from the Sub-Saharan Africa perspective. The study suggests that financial inclusion may be useful in affecting the size of shadow economy in Africa.