Assessing the Impact of Financial Inclusion on Economic Growth in Island Economies

Financial inclusion (FI) has become an essential strategy for enhancing economic growth and achieving inclusive growth in a country (Karlan et al., Rev Income Wealth 60:36–78, 2014). Although the theoretical relationship between financial inclusion and economic growth is acknowledged, more empirical evidence is necessary regarding the financial inclusion-growth nexus, particularly for small island economies. This book chapter thus aims to supplement the literature by providing an insightful analysis of the hypothesized link for a sample of small island developing states (SIDs). The research also investigates the reverse causal link: economic growth’s role in financial inclusion. A multidimensional financial inclusion index is constructed using the principal component analysis (PCA) and included in a classical augmented Solow growth function. Using a panel autoregressive distributed lag approach (PARDL) to account for the dynamic nature, empirical results confirm that financial inclusion is growth-conducive. The study could not establish any reverse causality using the panel Granger Causality test, validating a unidirectional relationship from financial inclusion to economic growth. Findings from this research supplement the existing literature on this SDG 8.10 goal and provide important implications for SIDs governments to consolidate and accelerate financial inclusion to enhance prosperity.