Does Financial Inclusion Matter for Economic Growth? Empirical Evidence of Lower-Income, Lower-Middle-Income, and Upper-Income Countries

Abstract

The primary objective of this study is to create a more comprehensive index of financial inclusion and examine the role of this Financial Inclusion index (FII) in economic development, focusing on a group of 91 countries with lower income, lower middle income and upper income countries from 2011 to 2012. Our research introduces a novel composite index of FI, using a broader range of indicators and employing principal component analysis (PCA) to overcome previous limitations. Utilizing the generalized method of moments (GMM) for dynamic panel models, we analyze the impact of FI on economic growth in the region. Our findings reveal that FI significantly contributes to economic growth, highlighting the need for targeted financial inclusion efforts towards the illiterate and unemployed, who benefit the least from existing initiatives. The study underscores FI's potential in reducing inequality and enhancing sustainable economic growth by advocating for policies that improve the accessibility and utilization of financial services among vulnerable populations. By expanding financial inclusion indicators and applying advanced analytical methods, this research provides new insights into the positive effects of comprehensive FI on economic empowerment. It offers valuable guidance for policymakers, financial institutions, and development agencies in promoting inclusive growth and poverty reduction in developing economies.