Geography, institutions and financial inclusion: A counterfactual approach

Financial inclusion is widely regarded as vital for economic development. This study investigates how geography and institutions influence financial inclusion. Specifically, it examines whether geography has a direct effect on financial inclusion (as suggested by Sachs’s geography hypothesis) or whether its influence operates solely through institutions, as proposed by the institutional hypothesis of Acemoglu, Johnson, and Robinson (2001; hereafter AJR). To explore this, the study employs a counterfactual framework using causal mediation analysis. Utilizing data from 64 former colonies over the period 2004–2018, the study finds that geography affects financial inclusion both directly and indirectly. The findings suggest that, to mitigate geography’s adverse impact on financial inclusion, policymakers should prioritize infrastructure development—such as expanding digital banking networks—and undertake institutional reforms aimed at enhancing financial inclusion.