Nexus Between Financial Inclusion and Economic Activity: A Study About Traditional and Non-Traditional Financial Service Indicators Determining Financial Outreach

This chapter empirically analyzes the link between financial inclusion (SDG 8.10) and economic activity. Instead of following the past literature and approximating financial inclusion by variables only capturing traditional financial services, this chapter considers non-traditional financial services, including mobile money and nonbranch retail agent outlets. With the help of the normalized inverse of the Euclidian distance and a one-way fixed effects panel model, this chapter documents empirically robust results about the positive link between financial inclusion and the level of economic activity. In addition, a break between poverty and financial inclusion is established by regressing the calculated index of financial inclusion on demographic, socioeconomic, and other variables concerning the health and depth of the financial sector. The implications of this finding in this analysis are twofold. First, it highlights the improvements in low, lower-middle, and upper-middle-income countries regarding outreach to financial services in the last decade. Second, it shows that the level of education and the soundness and depth of the local financial sector are essential in reaching higher levels of financial inclusion. Overall, our results emphasize the importance of targeted policies to increase the accessibility, availability, and usage of the financial sector to attain sustainable and long-lasting economic prosperity.