Effect of financial inclusion on economic development in Uganda (2010-2020)

Abstract

Financial inclusion plays an immense role in fostering economic development of a given economy. The research on the role of financial inclusion on economic development is scarce albeit with mixed and inconclusive findings. This study examines the effect of financial inclusion on economic development in Uganda using quarterly time series data obtained from the International Monetary Fund Financial Access Survey and the World Development Indicators of the World Bank from the first quarter of 2010 to the last quarter of 2020. The study assumed the Augmented Dickey Fuller and Phillips Perron tests to establish the stationarity constituents of data and using the ARDL bounds testing approach to cointegration to determine the level relationship, short run and long run relationship among the study variables. Precisely, the findings indicated that number of commercial bank branches and number of loan accounts with commercial banks exhibited a positive and significant effect on economic development both in the short run and long run. On the other hand, number of ATMs per 100,000 adults and number of deposit accounts with commercial banks possessed a negative and significant effect on economic development both in the short run and long run. Based on the above findings, the study recommends policies that promote financial literacy and facilitate financial inclusion in the form of increasing bank access points across the country, promotion of agency banking in the rural areas, promotion of government programs that facilitate extension of credit to the population at subsidized interest rates and creating an enabling environment that encourages competition in the banking sector. Furthermore, policies that support domestic investments such as creating a supportive investment climate are highly recommended. Key Words: Financial Inclusion; Uganda; ARDL; ADF; PP; ATMs