Financial Inclusion and Business Cycles

Abstract

Purpose This study aims to investigate the relationship between financial inclusion and the business cycle. Design/methodology/approach Regression methodology is used to analyze the association between financial inclusion and the business cycle. Findings Using regression estimation, the findings reveal that the level of savings and the number of active formal account ownership are pro-cyclical with fluctuations in the business cycle. Also, savings by adults particularly for women and poor people declines during recessionary periods while the number of active formal account ownership declines for the adult population especially for women during recessionary periods. The findings also reveal that not all indicators of financial inclusion are pro-cyclical with fluctuating business cycles. Practical implications The implication of this observed pro-cyclical effect is that individuals and households will exit the formal financial sector during a recession, as banks become unwilling to lend money to individuals and households during bad times and this will lead to financial exclusion and vice versa. Policymakers seeking to increase the level of financial inclusion in their countries should focus on the timing of financial inclusion policies along the business cycle as the findings suggest that it might be more difficult to achieve financial inclusion objectives during recessions or periods of economic downturns. Originality/value The current debate on financial inclusion pays little attention to whether financial inclusion is pro-cyclical with the fluctuating business cycle. This study explores the association between financial inclusion and the business cycle.