The Effect of Financial Inclusion and Financial Literacy on Financial Integration of West African Monetary Zone (Wamz)

Abstract

Deepening financial integration is important for developing economies especially in Africa, that accounts for less than 2% of the world's market capitalization. Financial integration facilitates risk sharing, aids the formation of larger markets which is beneficial to the firms and smoothens consumption inter-temporally. Financial integration will be enhanced through a well-developed financial sector that is all-inclusive of the economic agents in access to financial services at a low cost and at the most convenient time. The access to funds in an integrated market is further determined by the extent of financial knowledge acquired by the economic agents with respect to basic numeracy, interest compounding, understanding inflation and risk diversification. This paper examines the effect of increasing access to financial services and the level of knowledge of financial products on the financial integration of West African Monetary Zone. The ratio of total capital flows to GDP and interest rates on public debt were used in measuring financial integration while the measures of financial inclusion include the number of commercial bank branches, number of ATM machines available, Savings, number of account holders and credit to private sector. Data covering the period 1980–2020 were employed. Unit root test using Levin, Lin and chu t-test method and Im, et al statistics methods were employed while the cointegration test was conducted using the Wald t-test before the panel autoregressive distributed lag model estimation technique was used to estimate the models. The unit root test results revealed that three out of the ten variables were stationary at level whiles others were stationary at first difference. The Wald cointegration test shows that the two equations are cointegrated. The results from the study show that increasing the number of bank branches; the number of account holders; savings; credit to private sector and improvement in the level of financial knowledge with respect to financial services deepen financial integration of the West African Monetary Zone. The policy implication of the paper is that each economy's monetary authority and financial service providers must continue to advocate and institutionalise programmes that will deepen access to and knowledge of financial services, this will improve the extent of financial integration.