Assessing the impact of financial inclusion on economic growth: A comparative analysis between lower middle-income countries and upper middle-income countries

Abstract

Despite tremendous financial development, it has been increasingly acknowledged that financial systems are far from inclusive. With greater dynamism in the financial sector now, a critical evaluation around financial inclusion surfaces. The principal intention of this paper is to assess the impact of Financial Inclusion on Economic Growth in the Middle-Income countries. The evaluation concentrates on a comparative analysis between the Lower-Middle Income Countries and Upper Middle-Income Countries. The system Generalised Methods of Moments (GMM) model was adopted for a sample of 15 Lower-Middle Income Countries (LMICs) and 15 Upper Middle-Income Countries (UMICs) over the time period 2008 to 2019. Financial Inclusion was assessed by 3 dimensions, namely account ownership, demographic outreach and outstanding loans. The results showed that in the UMICs, all dimensions of financial inclusion had a positive relationship with economic growth. On the other hand, while the first two dimensions establish a positive link with economic growth in the LMICs, outstanding loans had a negative and significant effect. As for Financial Stability, the bank Z-score left a positive and significant footprint on economic growth in the MICs, with the significance being more prominent in the UMICs. Non-performing loans as an indicator for financial instability had a strong and adverse impact on growth in the MICs. Also, the paper further extends the analysis to the effect of financial inclusion on financial stability owing to the existence of a potential trade-off. While, account ownership and demographic outreach improved financial stability, outstanding loans, nevertheless, exhibit a negative and significant impact on financial stability in the MICs.