The relationship between financial inclusion and economic development in developing countries
Financial inclusion in developing countries has not been explored to the same extent as for developed countries, and there is limited knowledge of what drives financial inclusion in developing countries. This paper looks at the relationship between financial inclusion and economic development in developing countries using an Index of Financial Inclusion (IFI) and three economic development parameters; GDP (PPP), GDP Per Capita and the Human Development Index (HDI). The study found a positive relationship between financial inclusion and economic development in developing countries. This paper analyses a combination of factors associated with the Index of Financial Inclusion by running 20 regression sets of transformed IFIs on two variable sets: aspects of the banking sector and socio-economic variables. The analysis also includes physical infrastructure factors in each regression, namely: transport infrastructure, mobile cellular subscriptions, internet connectivity and fixed telephone infrastructure. The study found that infrastructure requirements that are critical for enhancing financial inclusion in developing countries include: transport infrastructure, mobile cellular subscriptions and internet connectivity. The study further found that socioeconomic factors, such as access to credit, employment opportunities and adult literacy, are also important in ensuring financial inclusion. Certain banking variables hinder financial inclusion, like high-interest rates, while an increase in foreign assets is positively associated with financial inclusion in developing countries. This research ultimately contributes to the body of knowledge regarding financial inclusion in developing countries.
A research report submitted in partial fulfilment of the requirements for the degree of Master of Management in Finance and Investment to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Wits Business School, Johannesburg, 2020