Financial inclusion and household debt: Evidence from low-income and lower-middle-income countries

Abstract

This study examines the relation between financial inclusion (FI) and individual debt in low- and lower-middle-income countries, focusing on whether increased access to financial services promotes borrowing. Although FI is often advocated for enhancing economic opportunities, its implications for debt accumulation remain underexplored, particularly in developing economies. Using categorical and binary indicators of FI, the analysis reveals a nonlinear relation between FI and individual debt, highlighting a threshold beyond which increased access correlates with higher borrowing. The empirical analysis is based on probit regression, complemented by a least absolute shrinkage and selection operator (LASSO)-logit model to ensure robustness. The LASSO-logit approach confirms the primary findings and improves model parsimony by selecting the most relevant predictors of borrowing. Results emphasize the dual-edged nature of FI and the need for a nuanced, context-specific policy design to prevent over-indebtedness in financially underserved populations.