Financial Inclusion And Economic Growth

People need reliable access to a broad variety of financial services, such as savings, credit, payments, transfers, andinsurance, to manage their lives, take advantage of business opportunities, and prepare themselves for major expenses and difficult times. While financial inclusion1 has been a concern of governments for several centuries throughout the world, in the past 20 years or so, financial access for the poor and the unbanked has rapidly evolved with microfinance.Thousands of new institutions have emerged to serve those at the bottom of the pyramid and microenterprises,and many of them have become financially sustainable while fulfilling a social mission. Many governments have adopted and continue to adoptnational strategies for financial inclusion. The emergence from the G-20 of the Global Partnership for Financial Inclusion shows that financial inclusion has become a major concern for leading countries worldwide.This access dimension of financial development has often been overlooked, mostly because of serious data gaps on who has access to which financial services and the barriers to broader access. However, without inclusive financial systems, poor individuals and small enterprises need to rely on their personal wealth or internal resources to invest in their education, become entrepreneurs or take advantage of promising growth opportunities. Financial market imperfections- such as informationand transactions costs – are likely to be especially binding on the talented poor and the micro and small enterprises who lack collateral, credit histories and connections. Hence,financial market imperfections can lead to slower growth.Theoretical models have shown that existence of financial market frictions can be the critical mechanism for generating poverty traps.A wide-ranging empirical literature, has found a significant and robust relationship between financial depth and economic development.Despite the emphasis it has received in theory, empirical evidence that links broader access to financial services to development outcomes has been very limited, providing at best tentative guidance for public policy initiatives in this area. This article attempts to study the factors which influence the growth from one different perspective——financial inclusion, through the empirical analysis to fill in gaps.The data we use are Global Financial Inclusion(Global Findex) Database、Enterprise Survey and Financial Access Survey.The dependent variable is the annual growth rate of real per capita GDP; The indicators of financial inclusion we construct include account at a formal financial institution, loan from a financial institution in the past year, electronic payments used to make payments, debit card, firms with a checking or savings account, firms with a bank loan/line of credit, firms using banks to finance investments, firms using banks to finance working capital, bank branches per 100,000 adults. Other social characteristics of the country include initial level of GDP, initial level of Human Capital, fertility rate, inflation rate, Openness ratio, government consumption ratio, the rule-of-law index, the democracy index, etc.By correlation test, we find that correlation among the account at a formal financial institution, electronic payments used to make payments, debit cardis unlimited and using them in the same model is unfeasible.we also find that correlation among the firms with a bank loan/line of credit, firms using banks to finance investments, firms using banks to finance working capitalis unlimited and using them in the same model is unfeasible.On this basis, OLS model is used to study the influence of the indicators of financial inclusion on economic growth.Finally, in order to find the evidence that the relationship between financial inclusion and growth is driven by "third variables" that simultaneously affect financial inclusion and growth,we add investment ratio, entrepreneurship index and innovation index into the model respectively.Through empirical research, we find that there is a significant and steady influence of loan from a financial institution in the past year and firms using banks to finance investments on the economic growth.Loan from a financial institution in the past year will increase growth and firms using banks to finance investments will decrease growth. Microcredit encourage entrepreneurial activity of household.The redistribution of credit toward new borrower segments may lead to risks for financial stability.Through empirical research, we also find that,in the country with high level of GDP per capita, Human Capital and democracy, account penetration, electronic payments penetration and debit card penetration will lead to slower growth. In country of high level of GDP per capita, the rule-of-law index and employment of Micro, Small and Medium Enterprise, firms using banks to finance investments will increase growth. In addition, We find that the relationship between financial inclusion and growth does not appear to operate through the effect of financial inclusion on education, investment, entrepreneurship, or innovation.Based on the analysis of research, we can conclude that there is a great need for better data and more research.Financial institutions should provide financial and business training to their clients in an effort to improve the financial management and use of microloans by these clients.The government needs to balance its wish to increase lending to those who previously had difficulty accessing financial services with the need to keep financial stability.