Effect of financial inclusion on economic growth: Evidence from East Africa

Abstract

The role of financial inclusion in the economic growth process of countries has received significant attention in the economics literature. In East Africa, there is scanty evidence on the effect of financial inclusion on economic growth yet financial inclusion has proved to have significant effect on poverty reduction and employment creation. This study examines the effect of financial inclusion on economic growth in the East Africa using panel data obtained from World Development Indicators over a period between 2004 and 2021. Panel Autoregressive Distributed Lag (ARDL) approach was applied to examine the short run and long run effects of financial inclusion on economic growth in the East Africa. The study found that financial inclusion has a strong positive and a significant effect on economic growth in the long run which is significant at 1% level but with insignificant effect in the short run. Specifically, the results show that a unit increase in financial inclusion measured by ATM concentration increases economic growth in East Africa by 6.29% while a percentage increase in financial inclusion proxied by mobile cellular subscriptions hurts economic growth by 6.17% ceteris paribus in the long run. The study findings found gross fixed capital formation, labour force participation rate, trade openness and general government final consumption expenditure to have a strong and significant effect on economic growth in the short run. The study findings recommend that there is need to support financial innovations through promoting digital financial instruments, pursue cashless agenda by encouraging individuals to open up mobile money accounts as well as investing in infrastructure development projects that support financial institutions such as ICT infrastructure to enhance economic growth. Key Words: Financial Inclusion; East Africa; Economic Growth; Panel ARDL