Impact of financial inclusion on economic development in emerging South Asian countries

Abstract

This study aims to investigate the influence of financial inclusion (FI) on economic development (ED) in emerging South Asian countries (SACs). A Composite Financial Inclusion Index (CFII) is computed to provide a comprehensive view of FI based on the penetration, availability, and usage of banking services (Sarma, 2008). Using secondary data from the World Bank, International Monetary Fund (IMF), and United Nations Development Programme (UNDP) from 2004 to 2021, a dynamic system generalized method of moments (GMM) regression model was utilised to examine the impact of FI and other macroeconomic variables on ED. The results indicate that FI positively impacts ED (Omar & Inaba, 2020). The findings also reveal that the Human Development Index (HDI), gross capital formation (GCF) and exports (percent of gross domestic product — GDP) have a positive impact on ED. However, income inequality (IIE) measured by the Gini coefficient and imports (percent of GDP) are detrimental to ED. This study provides evidence to support the expansion of banking services to build an inclusive financial system that promotes ED and reduces IIE. This study contributes to the empirical literature using the system GMM regression approach, which provides new insights into the relationship between ED and other development indicators like HDI, IIE, GCF, imports, and exports across SACs.