Khóa luận tốt nghiệp: The impact of financial inclusion on economic growth: International experience

Financial inclusion or the use of formal financial services can be seen as the Key to the sustainable development andgrowth of a country in which all sectors of society have the opportun

HANOI NATIONAL UNIVERSIT UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS

TOPIC

THE IMPACT OF FINANCIAL INCLUSION ON ECONOMIC

GROWTH: INTERNATIONAL EXPERIENCE

Hanoi - 2023

HANOI NATIONAL UNIVERSITY

UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS

TOPIC

THE IMPACT OF FINANCIAL INCLUSION ON ECONOMIC

GROWTH: INTERNATIONAL EXPERIENCE

Teacher Instructor Ph.D Luu Ngoc Hiep Student name Pham Thanh Binh - 19050621 Class QH 2019-E TCNH CLC 4

Program High-quality

Hanoi - 2023

I hereby declare that my graduation thesis “The impact of financial inclusion on

economic growth: International experience’ is the product of my own research In the

references section of the thesis, the use of references are clearly mentioned Theinformation and finding results provided in the graduation thesis are accurate If | am

wrong, I will take full responsibility and abide by all the rules of the subject and the

university.

Signature of teacher instructor Signature of student

First of all, I would like to express my deep gratitude to the teachers and instructors

at the University of Economics and Business - VNU, especially the instructor Ph.D LuuNgoc Hiep has wholeheartedly helped me to complete the graduation thesis I would alsowant to express my deep gratitude to the professors at the Faculty of Finance and Banking

- UEB for providing me with valuable information so that I can complete the thesis

My graduation thesis still has some errors and weaknesses due to limitedknowledge and reasoning ability; however, I hope that the feedback and contributions ofteachers will help my thesis be more completed

Best regards,

TABLE OF CONTENTS

IIk⁄ð09)33(00/.14210577 1LIST OF TABLES 1177 1

1 InETOẨUCÏOT 5c 5£ SE HH Hàn Hà Hà Hà HH TH HH TH HA TH1110110 101111 2

2 Literature T€VÏCW HH HH HH HH1 11T EETEREEEEEkrretrkee 4

2.1 Comprehensive financial meaSur€rmeTn( s- xesxe+xeerkekekkerrrekkrrkrrrrrrirkrrrrrrerrkke 52.2 The relationship between financial inclusion and economic growth 6

2.3 Other factors affecting ECONOMIC ØTOWÌh ss cxscsxvskrxxetrketrkrtrkrrrkrrrkrrrkerrrkee 12

2.4 ResearCh BaD vssssessssessseesssteesstensssecsueessueasssesssseesssessaseessseesasensuessueessneessueessuessasensaneesaneesaessanensunassesenaes 12

3 The theoretical framework ccssesssssssssessssessssessseessssessseessasesssasseessieesseessiessseessnensaesssns 13

3.1 The concept of financial incÏUSiOI -css-xxecrktikkkittkrtrrkrtrrirtrrirrriirrrrriiirrrrkerike 133.2 The role of financial incÏuSÏOT -s-ccccxecrrerrerrrrritrrirrrrrrrrrrrrrrrirrrrrrrrrrrrrrrrrree 14

3.3 Current status and experience of financial inclusion development in some

COUNTIES essesssessessteseessessessesssseseeseessesseesesssesseesesssseesseessssesseentensesseeaeeasesseeseeseesseeateatesseeseeateeseeaseateaneeseenees 16

3.3.1 Current status of financial incÌÏUSÏOI « «+c+++xvetrxexkeetrketketkrtrrrrrrerree 163.3.2 Some countries’ experience of financial inclusion development 19

4 Research methodology cesscssscsssessesssesssesssessssesssessasessueessneesseessessasessseessneeesneeesasensaneeseeeeaes 20

4.1 Data and research vwariabÌ@S -«-+-+++xx++kkt+ketrrrttrkttkrtkrtrrtirririrririirrrrrrirrrei 204.2 Research model and sample Selection ssesssessessesseessesssesseesssesseesssesssesssessessstssseesssesseeees 214.3 Research methods eescessssssecssssssecstssstesseesssecstecsteeneeestecseesaeesaeesaeeeseesseesseesaeesaeesaeesaeesteeseeseesaeesaes 25

5 Results and GisCussion ccssssesssessssssesssesssessesssesssesssesssesssesssessesseerseessesseeseensnsanensnenseeessesaeey 26

5.1 Descriptive StatÏSẨÏCS «HH HH HH HH HH HH1 HH g1 trệt 26

5.2 Correlation ẪAEFÏX 5< S+stéct+ HH HH1 1 1.11111111111101 275.3 Variance Inflation Factor (VIF) -s<ccsscreerrrrrkrtrrrrtrrkrrrrrrrrrrirrrrrrkrrrkrrrerrrerrrek 28

5.4, Baseline results essesssesssecssesssscssesssessessssssseessesssessssessesssessseesseessessseessessesssessseeaecsserseesaesaesseesseeees 28

6 COTCÏUSỈOH - 5 - << HE HH 1H 1T 34

02/2112 1007088 ẻ 37

LIST OF FIGURES

Figure 2.1 The analytical framework between financial inclusion and economic growth 7Figure 3.1 Number of access points per 100,000 adults -c«ccscccervereerrerreer 16Figure 3.2 The increase in digital financial services compared to pre-pandemic levels 17Figure 3.3 The use of traditional financial services in 2021 -«-cccseersrerrrerrree 18

LIST OF TABLES

Table 4.1 Variables description in the research model . « -«++c++xexxeexxetxreerxee 23Table 5.1 Descriptive statistics ceseesssessesssessecsecssecssecstecssecseecstecstecsieestecssecseecstecsiecstecaeesstesatesaeesseesse 26Table 5.2 Correlation Matrix cessessssssesssessecssesssecssecssecssesssesssesssecssecseesseecssecseesssecseesssecseesseeensesaeesseesss 27Table 5.3 Variance Inflation FCẨOF s«ccsscrterrrrrirrrirtrirtrirrrirrrirrrrrrrrrrrirriirrrrrrrrerrrerrree 28Table 5.4 Total variance explained uu eessesssecsessecseestesssessteestecstecseesstecnsecseesntecseecatecseesatesaeesseesneeses 29

Table 5.5 Suitability's examination of principal component analÌySis .- 29

Table 5.6 Model selection test F@SuÌÏfS s cxcrserirrrirrrirtrirrriirrirrrrrrrrrrririrrirriirrrrrrrrerrree 30Table 5.7 Estimated result with robust stamdard ©rTOF e «<©-+++rs+xexxerrrerrerree 31

With the global banking and financial system's development, people's access to

financial products and services has increased significantly Financial inclusion or the use

of formal financial services can be seen as the Key to the sustainable development andgrowth of a country in which all sectors of society have the opportunity to access financial

services at an affordable cost (Dahiya et al., 2020)

With the access and use of financial services such as deposits or insurance, a largeamount of capital will be mobilized in the financial market, thereby increasing productionoutput and the number of jobs, contributing to the improvement of life quality and income

distribution (Claessens et al., 2007; Demirguc-Kunt et al., 2017) In addition, many

documents also show a close relationship between financial inclusion and economicgrowth when it is also considered one of the main pillars in the goal of poverty reduction

and income inequality alleviation, financial stability and sustainable development (Kim, 2015; Neaime et al., 2018; Erlando et al., 2020; Sharma et al., 2022).

As one of the national policy goals and the broader topic discussed in most

international agendas, financial inclusion has been attracting much attention frompolicymakers, financial institutions and governments (Sharma et al., 2022) Expressly, inthe 2010 global development agenda with a vision for 2025, G20 leaders agreed onfinancial inclusion as one of the nine main pillars (GPFI, 2011; Le et al., 2019; Erlando etal., 2020) In addition, in the 2020 Global Financial Access initiative, the World Bank Groupand the International Finance Corporation (IFC), with targeted interventions, confirmed

their commitment to providing financial access for up to 1 billion adults Besides, a

separate forum geared towards developing countries, especially the ASEAN region, wasdiscussed in the Asia-Pacific Economic Cooperation (APEC) forum to provide financialaccess opportunities for small businesses and low-income households (Van et al., 2019)

According to a report from the Global Findex Database 2021, nearly 76% of the

world's adults have accounts with banks or any other credit, microfinance and mobile money service providers, of which this figure for developing economies is 71% On the other hand, despite the specific effects of the Covid-19 pandemic, especially restrictions

on social distancing, access to financial services in the market is still quite efficient with astrong boom of digital payments Specifically, before the epidemic, 18% of adults paid bills

directly from their accounts, and during the outbreak period, 80 million people in India

participated in online payments; China is 100 million people or 11% and 20% fordeveloping economies (FAS, 2021) Also, according to survey data from the IMF, for low-

middle-income economies, two indicators of financial inclusion are the number ofcommercial banks and the number of ATMs per 100,000 adults in the United NationsSustainable Development Goals (SDGs) are relatively stable along with an increase in thenumber of deposit accounts, loans or outstanding loans in the period from 2019 to thefirst half of 2021 These figures show the strong participation of national governments invigorously implementing policies to support individuals and businesses for the goal ofeconomic development in general Many countries have adopted various incomemeasures to provide a financial safety net for vulnerable households and businesses, such

as loan assistance or cash subsidies via bank accounts.

Although the overall financial inclusion situation in countries has improvedsignificantly, according to the latest World Bank estimates, half of the world's adult

population is still unbanked at a formal financial institution (Sharma et al., 2022) Most

unbanked people belong to the poor, marginalized and vulnerable groups, includingwomen (Cabeza-Garcia et al., 2019; Espinosa-Vega et al., 2020) Some common barriersinclude distance, affordability, lack of required documentation and lack of trust in the

formal financial system (Camara et al., 2014; Park et al., 2015; Pomeroy et al., 2020; Demirguc-Kunt et al., 2022) Therefore, within the new context, especially under the

influence of the Covid-19 epidemic, it is worthwhile to continue studying financialinclusion in an integrated manner while considering its impact on the economy (Emara etal., 2021; Chen et al., 2022)

Financial inclusion is a top concern in many countries Equally improving access tofinance for all individuals has always been a driving force to enhance stability andsustainable economic development Therefore, the purpose of this research is toexamine the impact of financial inclusion on economic growth at the internationallevel from 2015 to 2021 Besides, the article also examines the impact of economic andinstitutional factors on economic growth At the same time, a composite indicator offinancial inclusion will be constructed to assess the aggregate impact of financial inclusion

on economic growth To achieve the research objective, the study will answer two mainresearch questions: (i) What is the impact of financial inclusion and other factors oneconomic growth? (ii) What should countries do to maintain and realize their growthgoals better by improving the above-influencing factors?

To measure the effects of financial inclusion and other factors on economic growth,

the study collects data on financial inclusion indicators from the International Monetary

Fund (IMF)'s Financial Access Survey Report (FAS) and other economic and institutional

factors from the World Development Indicators and the Worldwide Governance

Indicators database from 2015 to 2021 for 176 countries Overall, the study found that

greater financial inclusion, a sufficient level of the labor force, high trade openness, moreInternet users, and higher government efficiency are associated with greater economicgrowth In contrast, government spending, unemployment rate and inflation level havethe opposite effect In addition, the study has yet to find empirical evidence for the impact

of the total population on economic growth

Based on inheriting previous studies, this study presents contributions on some of

the following aspects Firstly, certain theoretical contributions are related to financial

inclusion and its relationship to economic growth Besides, identify economic andinstitutional factors and their extent to economic growth Secondly, the study will

supplement empirical research findings on the impact of financial inclusion and other

factors on economic growth Finally, from the research results, some solutions areproposed to help improve people's access to finance at the international level to enhancestability and sustainable economic growth

The structure of the rest of the research will be as follows In Section 2, the related literature is discussed Section 3 presents the theoretical framework of financial inclusion.

The research data and model specification will be proposed in Section 4 Section 5

presents empirical results and Section 6 is the conclusion.

2 Literature review

In the field of financial inclusion, two main directions of research are usuallyfocused on The first one reflects different financial inclusion definitions from variousstudies integrating several aspects such as availability, usage, access or barriers Efforts

to develop a financial inclusion index (IFI) can come from different perspectives, such asmultidimensional indexes (Sarma, 2008; Sarma, 2012; Camara et al., 2014; Kim, 2015),financial access index (Honohan, 2008) or composite index (Demirguc-Kunt et al., 2012)

In particular, the Financial Accessibility Survey (FAS) from the IMF and the FinancialGlobal Findex (FGF) from the World Bank are the two primary data sources

In the second direction, based on the developed financial inclusion index, another series of empirical studies focus on the analysis of factors affecting financial inclusion

(Sarma, 2012; Camara et al., 2014; Park et al., 2015) and the link between financialinclusion, economic growth or income inequality at the household, corporate and national

levels (Marcelin et al., 2022; Emara et al., 2021; Kim et al., 2018; Hu et al., 2021; Nizam etal., 2021; Pomeroy et al., 2020; Feghali et al., 2021; Kim, 2015)

2.1 Comprehensive financial measurement

Scholars have combined various aspects of financial inclusion into a single index

in the first series of theoretical and empirical studies A good measure of financialinclusion should include three criteria: simplicity of calculation, ability to combine

multiple dimensions and comparability across countries (Kempson et al., 2006) Sarma

(2008) built a comprehensive financial index using a series of indicators related to thebanking sector, such as availability, bank penetration and usage These indices aredeveloped based on the normalized inverse Euclidean distance and calculated for a

particular country in a year According to the author, this method is convenient for

building an index satisfying the necessary and straightforward mathematical properties

Sarma (2012) revised, updated and used the index to examine its correlation with

economic development Inheriting Sarma (2008), Kim (2015) used three dimensions of use, availability and penetration with equal weight Park et al (2015) also established the

same multidimensional index as Sarma (2008) and instead of a specific year, a seven-yearaverage was used Thus, although the applied dimensions may vary between studies, theresearch framework and the calculation method of Sarma (2008, 2012) have receivedsignificant attention from scholars in the construction of financial indicators

Providing a multi-dimensional financial inclusion index for 82 countries, Camara

et al (2014) developed financial inclusion across three dimensions: usage, barriers and

access In terms of usage further divided into three indicators: (i) have a savings account,(ii) own at least one financial product, and (iii) have a new loan with a formal financialinstitution The second aspect of barriers refers to the obstacles that prevent individualsfrom accessing formal financial services and it consists of four indicators: affordability,distance, trust and documentation requirements Finally, the four metrics used tomeasure access include the number of ATMs or commercial bank branches per unit, say

1,000 square kilometers or 100,000 adults Then through a two-stage principal component analysis (PCA), the dimensions are combined to create an overall

comprehensive IFI Some studies have used this method to build and measure IFI, such asCamara et al (2014), Le et al (2019), Chen et al (2022) and Sharma et al (2022)

Having constructed a measure of financial inclusion for more than 160 countries,

Honohan (2008) measured financial inclusion by econometrically estimating the adult

population per household ratio of an economy with a bank account These estimates can

effectively quantify one aspect of financial inclusion which is financial penetration.

However, according to Sarma (2012), such a measure has many shortcomings as severalvital aspects of financial inclusion are overlooked, including affordability, availability,quality and usage

Most recently, to build a financial inclusion index from the Global Findex database,Demirguc-Kunt et al (2012) surveyed 150,000 adults in 148 countries in 2011 Thisinitiative provides interesting financial inclusion indicators from a micro perspective by

categorizing individuals according to income group, gender, and education level These

indicators include the percentage of adults with an account with a formal financialinstitution, adults using informal or formal account savings and borrowing, and the

percentage of adults with credit/debit cards, with a mortgage and health insurance.

2.2 The relationship between financial inclusion and economic growth

As an essential driver of the economy, financial inclusion helps people accessformal financial products and services such as insurance, credit, safe savings andinvestment opportunities (Sharma et al., 2022; Ozili et al., 2022) Sahay et al (2015) arguethat greater access of firms and households to various banking services, especially for

women and vulnerable people, has an enormously positive impact on economic growth.

Financial inclusion contributes to economic growth through small businesses creatingvalue with positive spillovers on human development indicators, including health,

education, poverty, and inequality reduction (Park et al 2015; Kim, 2015) An

explanation of the relationship between financial inclusion and economic growth hasbeen shown in detail through the diagram in Figure 2.1

Figure 2.1 The analytical framework between financial inclusion and economic

growth

Financial Inclusion

a

Access to affordable credit Access to attractive deposit

and insurance products

Increase in standard of Improvement

living Pa of Human

development

indicators like

Reduction in Poverty health,

level us nutrition and

in rural areas This increase in value at the grassroots level contributes to state and

national output growth, leading to higher growth at the macro level The resulting

increase in employment also means a rise in people's incomes and living standards,thereby reducing inequality and poverty while promoting economic growth

Second, in the financial markets, financial funds are raised by universalizing

deposits and insurance products for the excluded This ensures that their savings are kept

in financial markets and then efficiently reallocated into long-term investment projects

In this way, liquidity risk in financial markets is controlled and investment is encouraged This process, according to Claessens et al (2007), also results in increased output,

employment and improved income distribution for the poor, leading to substantialeconomic growth

In the following, several studies, from the development of separate financial

indicators, have presented the impact of financial inclusion on growth, economic stability

or inequality Investigating the relationship between broad dimensions of financialinclusion and economic growth in India between 2004 and 2013, the three coredimensions of financial inclusion used by Sharma (2016) are bank penetration,availability of banking services and use of banking deposit services The study finds apositive association between economic growth and several aspects of financial inclusion

In addition, based on Granger causality analysis, the study also shows a two-way causal

relationship between geographic accessibility and economic development, as well as a

one-way causality that runs from the number of deposit/loan accounts to GDP StudyingIndia from 2005 to 2017 using the same three dimensions of financial inclusion, use,

penetration and accessibility, Dahiya et al (2020) show similar results as Sharma (2016).

In contrast, Singh et al (2021) find a negative result in the relationship between financialinclusion and economic growth for 26 districts in India, emphasizing the centralizationpolicy implication on digital payment channels, banking and mobile wallets Research in

India from 1991 to 2018, Pradhan et al (2021) shows a solid endogenous relationship between economic growth, financial inclusion initiatives and ICT infrastructure

development in both the short and long term

To examine the link between financial inclusion and economic growth for the

countries of the Organization of Islamic Cooperation (OIC) comprising 55 economies from

1990 to 2013, Kim et al (2018) use five variables to measure key dimensions of financialinclusion, which are: (1) Automated teller machines per 100,000 adults, (2) Bankbranches per 100,000 adults, (3) Accounts commercial bank deposits per 1,000 adults,(4) Commercial bank borrowers per 1,000 adults, and (5) Life insurance premiumrevenue per GDP Based on the Arellano-Bond dynamic panel estimates, the study showsthat financial inclusion plays a vital role in promoting economic growth and there is acausal relationship between the two variables

Estimating the impact of financial inclusion expressed as access to finance oneconomic growth by reducing income inequality for 40 OECD member countries and theEuropean Union (EU) from 2004 to 2011, Kim (2015) shows that income equality has anegative impact on GDP growth and the most substantial extent occurs in low-incomecountries than in countries with a high degree of fragility In particular, this trend is morepotent in high-vulnerability countries than low-vulnerability countries

Research on the relationship between financial inclusion, governance andeconomic growth in the period 1990 - 2018 for 44 countries in the MENA region, theresearch results of Emara et al (2021) show that financial inclusion measured by thehousehold financial access index has a significant positive impact on economic growth In

addition, the article also argues that the effectiveness of enterprises’ access to finance is

only meaningful in the presence of strong institutions, the availability of bank loans withadequate supervision and regulation, control of corruption, independent judiciary andpolitical stability

Investigating the impact of financial inclusion and openness to trade on theeconomic development of 27 European Union (EU) countries from 1995 to 2015, Huang

et al (2021) show that financial inclusion through two aspects of access and use has a

significant and positive impact on economic performance in the EU country, of which the

impact in low-income countries and new EU members are more significant than in income and former EU countries In addition, the article also recognizes the critical roles

high-of capital, labor, energy consumption and trade openness in promoting economic growth

Using cross-sectional estimation techniques to investigate the effect of financial

inclusion on the growth of 889 companies in 5 ASEAN countries, Nizam et al (2021) showthat the impact of financial inclusion on firms' growth is significantly negative after

reaching a certain threshold, especially for companies in the manufacturing sector Having

assessed the impact of financial inclusion on three aspects of access, availability and use

on economic growth in 37 developed countries and 21 emerging countries in 2006 - 2017,Nguyen et al (2020) show the positive impact of financial inclusion on economic growth

At the same time, the article also shows that trade openness and intellectual propertyrights positively impact economic growth In particular, financial inclusion has moreimpact on economic growth in developed countries than in emerging countries Similar tothe study in emerging markets from 2004 to 2015, Van et al (2019) also show a positiverelationship between these two variables, in which, a stronger relationship is found forlow-income countries and lower levels of financial inclusion Sethi et al (2018) researchfor 31 countries, including developed and developing countries from 2004 to 2010, shows

a positive and long-term relationship between financial inclusion and economic growth,where there is a two-way causal relationship between these two variables Karim et al.(2022) used the dynamic panel threshold estimation technique to assess the impact offinancial inclusion on the economic growth of 60 countries from 2010 to 2017 The

paper's results show a positive effect of financial inclusion on economic growth In

particular, the threshold effect of financial inclusion has a more significant

growth-promoting effect in LDCs and emerging markets such as Africa and Asia than in developed

countries.

Testing the impact of women's financial inclusion dimensions on inclusive

economic development for 91 countries, Cabeza-Garcia et al (2019) shows that financial

inclusion is greater among women as measured by access to bank accounts and access tocredit cards have a positive effect on economic development; however, the aspect of bankloans did not show any significance

Analyzing the impact of financial inclusion on economic growth in religious andsecular countries from 2006 to 2020, Ozili et al (2023) show that the extent of financialinclusion through the expansion of bank branches, combined with greater use of theInternet, will benefit economic growth in both religious and non-religious countries.Furthermore, other similar studies also show a positive relationship between financialinclusion and economic growth (Babajide et al., 2015; Hu et al., 2021; Azimi, 2022; Ozili

et al., 2022; Chen et al., 2022; Sharma et al., 2022)

Developed a separate financial inclusion index to assess different macroeconomic and country-specific factors affecting financial inclusion for 37 developing Asian

economies from 2004 to 2012, Park et al (2015) show that per capita income, rule of law

and demographic characteristics have a significant influence on financial inclusion In the

study of Camara et al (2014) for 82 countries, the authors show that the level of financialinclusion is highly correlated with a number of macroeconomic variables such as GDP percapita, education, financial system efficiency and financial stability Examining the impact

of the shadow economy on financial market inclusion in the short and long run usingannual data from 1980-2013 for 18 emerging economies, Hajilee et al (2017) find thatthe shadow economy has significant short-run asymmetric effects on financial marketinclusion in most emerging economies

Using panel data from 44 sub-Saharan African countries from 1990 to 2018,Amponsah et al (2021) empirically investigate the moderating role of financial inclusion

on the relationship between informality and inclusive growth The results show thatfinancial inclusion exhibits an inverted U-shaped relationship with growth,demonstrating that its regulatory role in the informal-inclusive growth relationship isheterogeneous In addition, the results also show that government spending, governance,

human capital, domestic investment and trade openness increase inclusive growth while

inflation and foreign direct investment hinder growth

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Assessing the impact of financial inclusion on income inequality, poverty andfinancial stability in eight MENA countries between 2002 and 2015, Neaime et al (2018)find that financial inclusion reduces income inequality, contributing positively to financialstability but having no impact on poverty In addition, population, inflation, enrollment

rates and trade openness are found to increase poverty and income inequality

significantly Empirical analysis of the impact of financial inclusion on economic growth,poverty reduction and income inequality in Eastern Indonesia, Erlando et al (2020)shows a high degree of relationship among these variables Financial inclusion has a

positive effect on inequality, leading to widening income inequality in Eastern Indonesia.

In contrast, socioeconomic growth has a positive impact on financial inclusion and anegative impact on poverty In addition, studying the effects of financial inclusion on thefinancial stability of the banking system in more than 140 countries, the research results

of Feghali et al (2021) show that access to credit has a negative impact on bankperformance and stability A more competitive structure in the banking industry would

be directly proportional to banks' credit risk tolerance, potentially adversely affecting

credit stability In addition, access to credit can undermine financial stability if credit growth occurs without regard for the borrower's ability to repay.

Examining the trend of financial inclusion in Asia and its impact on financialperformance and financial sustainability in 31 countries between 2004 and 2016,research findings by Le et al (2019) show that inclusive financial growth has a negativeeffect on financial performance while positively affecting financial sustainability Inaddition, the study also shows that the increase in financial inclusion due to the extensiveinvolvement of low-income clients in the financial system can lead to increasedtransactions and high information costs

In an empirical investigation of the relationship between financial inclusion, bankownership and economic performance for 44 countries from 2004 to 2017, Marcelin et al.(2022) show that financial inclusion in terms of usage and access to services, includingATM and deposit account availability has a positive impact on economic performance Inparticular, the article also emphasizes the importance of accelerating financial inclusion

as well as strengthening institutional quality to improve the quality of the banking

structure.

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2.3 Other factors affecting economic growth

Solow (1957) sparked a debate about the causes of economic growth, especially in

East Asian countries, showing that the main drivers of economic growth include

productivity, labor, and capital In addition, the work of Mankiw et al (1992) and Young(1995) is also one of the first pioneering studies investigating the origin of economicgrowth and explaining international variations in growth and income The researchresults show that productivity, labor force, and capital are critical factors influencingeconomic growth Investigating the factors affecting the economic development of 100countries from 1960 to 1990, Barro (1996) shows that economic variables and human

capital can improve the economy significantly Among them, reduced government consumption, inflation rate and birth rate, increased life expectancy and education, more

effective legislation, and the balance of trade improvement are all considered drivers for

to study the impact of information and communication technology (ICT) on economic

growth in some African countries in the period 1988 - 2007, Kpodar et al (2011) showed

that ICT has contributed significantly to economic growth in African countries Evaluatingthe contribution of education to the economic development of Pakistan in the period 1971

- 2008 using the least squares (OLS) method, Khattak et al (2012) showed that educationhas a positive effect on economic growth The authors also suggest that public policy

should prioritize education issues, seriously improve primary education, and discourage dropout rates at all levels to achieve sustainable economic growth Besides, in parallel

with assessing financial inclusion's impact on growth, other economic factors such asinflation, trade openness, institutions, technology, labor force, and population are alsoevaluated by many other studies and mentioned in the research model (Kim et al., 2018;

Neaime et al., 2018; Cabeza-Garcia et al., 2019; Emara et al., 2021; Pradhan et al., 2021;

Sharma et al., 2022; Karim et al., 2022; Marcelin et al., 2022) Most of the factors foundhave a positive effect on economic growth

12

2.4 Research gap

In general, most of the previous studies by using different econometric methodssuch as Granger causality analysis, dynamic panel estimation, generalized momentmethod (GMM), principal component analysis (PCA), or generalized least squares (GLS)

have calculated financial inclusion and investigated the link between financial inclusion

and poverty reduction, women's empowerment, efficiency, financial stability andsustainable economic growth Financial inclusion can affect economic growth in bothpositive and negative ways Besides financial inclusion, many studies show that a number

of factors, such as education, labor, science and technology, the openness of the economy

and institutions, also influence economic growth

Although it is not a new topic, financial inclusion is still an issue that has received

much attention in many countries, recognized as one of the main goals of national

development Over time, the results of financial inclusion and its impact will also havecertain changes Therefore, it is necessary to have new studies to evaluate this issuefurther to update it to suit the new situation Therefore, the difference in this study will

focus on assessing the impact of financial inclusion on economic growth at the

international level in the new period from 2015 to 2021

3 The theoretical framework

3.1 The concept of financial inclusion

The term "financial inclusion" began to receive a great deal of attention since theresearch on financial exclusion and the policy-making problems of the socially excludedemerged at the end of the 1990s with direct consequences of poverty (Leyshon et al.,1993) Subsequently, the category of people excluded from the formal financial system in

the UK was investigated by Leyshon et al (1995), providing an interpretation of the term

financial inclusion and showing that bank accounts are an essential financial service forlow-income individuals in society Then, in the early 2000s, the term financial inclusion

was Officially born, recognized and widely used (Babajide et al., 2015).

Leyshon et al (1995) introduced the earliest concept of financial inclusion anddetermined that it is the process by which certain groups of individuals and societies gainaccess to the formal financial system With the IMF (2015), financial inclusion is viewed

from many aspects First, financial inclusion can be defined as the access and use of formal

financial services In this sense, financial inclusion emphasizes the ability of services to

13

serve various purposes, including transfers, payments, savings, insurance, and credit to

individuals or enterprises Second, from the service supply perspective, financial

inclusion refers to the variety and quantity of financial products Finally, from theperspective of users, it refers to the percentage of people using accounts to receive,transfer and borrow money at organizations by income, gender, the number of businessesand investors getting credit from banks and the level of insurance product usage.According to the World Bank, financial inclusion means that financial products andservices, including payments, remittances, savings, credit and insurance, are provided in

an appropriate, convenient, responsible and sustainable way to all individuals and

organizations, meeting their requirements at a reasonable cost (WB, 2018)

As such, there are many different expressions for financial inclusion However, in

the most general way, financial inclusion can be understood as the fact that all members

of society, especially vulnerable groups, have access to convenient and appropriatefinancial services to enhance the accessibility and use of financial services, therebycirculating investment capital, facilitating livelihoods, savings in society and promoting

economic growth.

On the other hand, within the scope of this study, the article will be based on Sarma(2012) posting that financial inclusion is about ensuring the ease of access, availability

and usage by all members of the economy in the formal financial system Accordingly, this

concept emphasizes the above dimensions, including accessibility, availability and usage

The above aspects are profoundly related to the construction of comprehensivefinancial indicators Specifically, the IFI measures by constructing individual metrics foreach of the fundamental dimensions of financial inclusion known as componentindicators Accessibility or penetration is measured by the number of deposit accounts atmicrofinance institutions or commercial banks and the number of registered mobiledeposits per 1,000 adults Aspects of financial service availability are measured by thenumber of registered mobile financial service agents, ATMs, and banking transactionbranches per 100,000 adults The last aspect of financial service usage is assessed throughthe total volume of credit transactions and deposits

3.2 The role of financial inclusion

In many studies, the role of financial inclusion in socioeconomic development has

been confirmed, typically by Levine (2005), Beck et al (2008), Johnson et al (2009),

Hastak et al (2015), Erlando et al (2020) and Pradhan et al (2021) According to Beck et

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al (2008), financial inclusion development has two effects on economic growth First,financial development drives economic growth, increasing savings and helping start-upsinvest and produce, thereby reducing poverty and inequality The second is to provideaffordable, appropriate financial services and improve welfare for the disadvantaged.Agreeing with Beck et al (2008), Hastak et al (2015) assert that financial inclusion isessential for developing countries to help low-income areas access financial services,thereby contributing to poverty reduction and promoting economic development.Through a large number of participants and their savings in the financial system, theeconomy will gain momentum from growth investment in productive sectors.

Inclusive financial policies are designed to provide vulnerable individuals access

to important services such as microfinance, savings accounts, home loans, insurance,financial insights and market information to invest in the expanding quality of life, all ofwhich complement broader economic growth (Pradhan et al., 2021) By improving thequantity, quality, effectiveness and efficiency of financial products and services, financialintermediary services indirectly improve people's livelihoods and strengthen the

economy (Erlando et al., 2020) In summary, the role of financial inclusion in socioeconomic growth can be summarized through several critical aspects as follows:

First, by enhancing the ability to mobilize savings and investment for production

development, financial inclusion promotes economic growth Johnson et al (2009) have

shown that mobilizing savings and investment in the manufacturing sector can be themain driving force for economic development Local production can benefit from thesavings raised by the excluded as they gain access to credit, savings and other povertyalleviation services to improve welfare (Babajide et al., 2015)

Second, financial inclusion helps people experiencing poverty to access affordablefinancial services that meet their daily needs A common problem among the poor is thattheir income is often low and unstable (Pradhan et al., 2021) This requires them to beable to self-manage their precarious income to ensure a cumulative cash flow and to covermonthly expenses, including bill payments, education, and emergencies (illness, accident,unemployment) When financial needs arise, most people often choose informal financialservices when they cannot access formal and semi-formal services (Neaime et al., 2018).However, this is very risky, unreliable, unsafe and can increase the cost burden on peoplewith low incomes Accordingly, financial inclusion at a reasonable cost will help

disadvantaged populations access the formal financial system, thereby contributing to

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lives improvement, jobs creation, equity promotion, financial stability and inclusivegrowth (Kim, 2015; Dahiya et al., 2020; Sharma et al., 2022)

Finally, financial inclusion contributes to reducing income inequality, poverty andimproving the marginalized society's quality of life and welfare Access to financial

products and services will help the poor increase their ability to accumulate assets, find

jobs, improve income and withstand economic shocks (Claessens et al., 2007; Erlando etal., 2020) By accessing convenient loans and safe income, financial risks or other forcemajeure events can be minimized, helping the disadvantaged to overcome difficulties and

restore production and business at the same time, avoiding the vicious cycle of debt and

the risk of poverty (Babajide et al., 2015; Demirguc-Kunt et al., 2017) In addition, financialinclusion can help reduce poverty and inequality by helping people invest in the future,

moderate consumption and manage financial risk (Pradhan et al., 2021) On the other

hand, on the government side, financial inclusion can also help reduce costs for socialsecurity benefit programs via bank account payments to increase transparency andprevent corruption, thereby better-managing society (Kim, 2015) Finally, by creating

value for small businesses and improving human development indicators such as health,

nutrition, education, inequality and poverty reduction, economic growth will bepromoted stability and sustainability (Park et al., 2015; Dahiya et al., 2020)

3.3 Current status and experience of financial inclusion development in some

countries

3.3.1 Current status of financial inclusion

The Covid-19 pandemic has disrupted how people access traditional financialservices, promoting greater use of digital finance This behavior is likely to continue

during the peak of the global and post-pandemic (McKinsey & Company, 2022, World

Bank, 2022) If before and during the pandemic, the two indices of the number ofcommercial bank branches per 100,000 adults and ATMs per 100,000 adults recorded

stability at 12 and 23, respectively, over the past few years, with a slight increase in 2020

(Espinosa-Vega et al., 2020; IMF, 2020), they decreased significantly in the second half of

2021, while the non-traditional digital finance approaches, especially mobile money indeveloping economies, have increased significantly since the outbreak of the COVID-19pandemic (Figure 3.1) Besides, between 2019 and 2021, the number of mobile moneyagents per 100,000 adults has nearly doubled from about 450 to 880 worldwide, mainlyincreasing in Africa and Asia

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Figure 3.1 Number of access points per 100,000 adults

Mi ArM: HN Bankbranches [J Mobile money agents (registered) |) Retail agents

Source: Financial Access Survey (IMF, 2022)

According to the IMF (2021a), the decrease in the number of commercial bank

branches and ATMs per 100,000 adults is mainly due to efforts by banks to cut costs.Among them, in the group of high-income countries, the most significant decline in ATMswas seen in the European economies At the same time, in some low- and middle-incomecountries, such as Latin America, Colombia, Honduras, Peru and India, branchless resellerbanks are increasing to provide services beyond the traditional branch network Besides,the use of digital financial services has also recorded a significant increase in the value oftransactions (Figure 3.2) In low-income economies, the value of mobile money

transactions increased from about 40% of GDP to 70% between 2019 and 2021 Besides,

higher Internet and mobile banking levels were also recorded in the middle- and income countries, with the figure rising from 225% of GDP to 324% of GDP During thepandemic, the importance of mobile money or payments digital computing has increaseddue to minimal physical contact allowed during lockdowns and high levels of mobilemoney penetration among the unbanked population (Agur et al., 2020; Shirono et al.,2021a; Bazarbash et al., 2020)

high-Figure 3.2 The increase in digital financial services compared to

While digitized financial services have become increasingly important during thepandemic, traditional banking services such as bank loans and deposits still remain animportant aspect of financial inclusion Both depositors and borrowing rates increasedsteadily across most national income groups (Figure 3.3) Similarly, total outstanding

loans and deposits as a share of GDP were stable during 2019-2020 and there was a slight

decrease in outstanding loans in middle and high-income countries in 2021 Governmentpolicies such as income support and transfers were adopted to support these outcomes

in response to the new post-pandemic situation (IMF, 2021a) However, unlike the

upward trend in deposits and loans in 2020, when these policies are fully implemented,

stable deposit and lending levels in 2021 in some countries' policies are being loosened

Figure 3.3 The use of traditional financial services in 2021

Depositors Outstanding deposits

Low-income Low-income

Middle-income Middle-income

High-income High-income

° 30 20 số so so so

Share of adult population Percent of GDP.

Borrowers Outstanding loans

Low-income Low-income

Middle-income Middle-income

High-income High-income

Share of adult population Percent of GDP

@ 2021 TM 2020 TM 2019

Source: Source: Financial Access Survey (IMF, 2022)

With the gender gap still in place in 2021, women's access to finance remainschallenging, especially in low- and middle-income economies According to Findex(2021), an estimated 740 million women are unbanked or financially excluded Gendergaps in access to finance persist, with women recording lower rates of account ownership,savings and outstanding loans than men (IMF, 2022) Besides women, some other sociallydisadvantaged groups, such as the poor, the uneducated and people outside the laborforce, especially in developing and emerging countries, still face difficulties accessing andusing finance services (Camara et al., 2014) Some of the most cited reasons across thedocuments are geographic distance, lack of funds, affordability, lack of trust in thefinancial system and inadequate documentation requirements (Findex, 2021) Inaddition, ineligibility, non-availability, financial illiteracy (Kim, 2015) and religiousreasons (Ozili et al., 2023) are also barriers to accessing and using loans from vulnerable

groups at formal financial institutions.