Abstract
Orientation: Literature emphasises that institutional quality and governance are important elements in enhancing financial inclusion. Studies on institutions, governance and financial inclusion in developing economies found that governance and institutions have positively influenced people wanting to make savings and open a formal bank account. Research purpose: This study investigated the impact of institutional quality and governance on financial inclusion in Africa. Motivation of the study: The significance of how governance and institutions affect access to finance has largely been overlooked in previous research. Thus the principal objective of this study is to address this research gap. Research approach/design and method: A system generalised method of moments technique for a panel data of 49 countries for the period 2004–2016 was employed. Main findings: The results obtained suggest a positive impact of institutional quality and governance on financial inclusion within the region. Our study also found a significant positive effect of the lagged value of financial inclusion and banking sector size on financial inclusion for African countries. However, rural to total population and natural resources negatively influenced financial inclusion in Africa. Practical/managerial implications: This study provides implications for policymakers which are fruitful if implemented. Policymakers should facilitate the existence of a transparent legal framework, removal of corruption and enhancing fair administration and judicial proceedings so as to enhance the prospects of financial inclusion. In addition, improving economic freedom and governance levels minifies the informality levels in the financial markets. Contribution/value-add: This study adds value and knowledge to the current body on financial inclusion and governance issues in Africa, which has not received much attention in developing economies.
Highlights
The literature emphasises that governance and the quality of institutions are key elements in enhancing financial inclusion
As a result of poor development of ‘state variables’ in rural areas, supply is normally reduced as financial institutions find it difficult to operate in such areas
People residing in rural areas generally have less demand for financial services, bringing about low usage
Summary
The literature emphasises that governance and the quality of institutions are key elements in enhancing financial inclusion. Strong enforcement mechanisms and adequate regulatory/legal frameworks are critical drivers of financial inclusion. These assumptions have been largely reconsidered in the last two decades with authors such as Barry and Tacneng (2014), arguing that for financial inclusion to succeed, it is vital for reforms to be implemented in the right sequence and at the right speed. From the foregoing discussion, it is probable that financial inclusion has links with institutional quality and governance. Investigating the role of institutions and governance in Africa is fundamental as sustainable financial inclusion aiming at promoting economic growth requires their efficient and robust presence
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