Financial Inclusion:Measurement,and Nexus With Economic Growth In Africa

Financial inclusion is getting policy priority across the world due to the fact that it allows access to and use of financial services.However,the measurement of this financial inclusion indicator and its impact on social benefit in Africa is not yet clear.The objective of this study is to measures the level of financial inclusion for African countries and also investigate the nexus between financial inclusion and economic growth and also its impact on financial stability in Africa.The study used panel data cover from 2004 to 2020 for 33 African countries.The financial inclusion indicators data were compiled from IMF’s FAS database and macro-economic variables were compiled from the World Bank Development Indicators database.Principal Component Analysis(PCA)is applied in the study to construct the financial inclusion index in two stages.In the first stage,the study develops three sub-dimensional indexes of financial inclusion such as geographic financial outreach,demographic financial outreach,and financial usage from fourteen financial inclusion indicators.The first two sub-indexes represent the level of financial access in Africa and the third sub-index represents the level of financial usage in Africa.In the second stage,the study used the three financial inclusion sub-indexes constructed in the first stage as variables to build the level of overall financial inclusion index for each of the selected African countries.Bartlett’s test of sphericity(BTS)and KMO test were conducted to investigate data suitability for PCA analysis.The results of PCA generally reveal that the level of the overall financial inclusion index is very low for the majority of African Countries and only a few countries with high GDP per capita are attaining a high level of financial inclusion in Africa.This indicates that although more African countries have undertaken substantial financial inclusion reforms,the extent of financial inclusion across the continent is still very low.To explore the impact of financial inclusion on economic growth in African countries,the study applies fixed effects and dynamic(GMM)data estimation approaches.In both panel data estimations,even though African countries experienced a low level of financial inclusion,this study found that there is a significant positive relationship between financial inclusion and economic growth in Africa.This indicates that financial inclusion can improve economic growth and has a positive impact on social welfare.The study also found that financial inclusion has a positive impact on financial stability in Africa.Finally,the study wishes to aware the African governments that financial inclusion is one of the driving factors of economic growth and has a higher policy implication for African countries.Thus,the study recommends that African governments and policymakers may consider three policy priorities.First promote a variety of alternative financial institutions channels such as Financial Market,Microfinance Institutions,Social Security,etc.Second,facilitate the use of advanced and digital technologies like e-commerce.Third,fostering financial infrastructure and regulatory framework to protect society from information asymmetry and promote public confidence.