Financial Inclusion, Financial Literacy and Inclusive Growth in Africa.

Abstract

The aim of this study is to investigate the nexus between financial inclusion, financial literacy and inclusive growth in Africa. The study uses a modified version of Sarma (2008) approach to compute an index of financial inclusion and inclusive growth. The system-generalized methods of moments is employed to analyze the link between financial inclusion and inclusive growth. Ordinary Least Squares with robust standard errors is employed to investigate the link between financial literacy and inclusive growth. Lastly, the causal step and bootstrap approaches are used to investigate how financial institutions mediate between financial literacy and financial inclusion. The study finds that the extent of financial inclusion remains low relative to indices that have been computed using earlier data. Also, the level of inclusive growth is low in Africa. In addition, the access dimension of financial inclusion has a significant positive impact on the participation dimension of inclusive growth. Financial access is inversely related to poverty although not statistically significant. Further, the usage dimension shows a positive but insignificant impact on both the participation and benefit dimensions of inclusive growth. It also finds that financial literacy has a positive and statistically significant impact on participation dimension of inclusive growth. Finally, commercial banks and other financial institutions mediate between financial literacy and one or more of the financial inclusion indicators of account ownership, savings and bank credit. To conclude, this study provides evidence that for inclusive growth to be scaled up in Africa, financial inclusion needs to be expanded. One way to do this is to embark on deliberate financial literacy programme. Low inclusive growth in Africa gives indication that there is low participation of the working population in the growth process and this weakens the base of economic activities that spurs growth. Nonetheless, there is an opportunity to harness the role of other financial institutions to improve financial inclusion through a deliberate financial literacy plan. Low level of financial inclusion and inclusive growth is a threat to the fight of poverty and inequality in Africa. The policy recommendations of this research are: firstly, policy makers need to consider developing, implementing and continuously reviewing a national financial inclusion plan in each of the countries in Africa in order to improve financial inclusion. Also, there is the need for policies that focus on expansion of economic opportunities and provision of access to productive resources that targets both the formal and informal sectors of the economy. Further, policy makers should sensitize non-bank financial institutions to actively embark on financial literacy initiatives. Lastly, the scope of financial inclusion needs to be broadened to include the activities of non-bank financial institutions in the fields of practice and academia. This research contributes to practice and literature by expanding the indicators used to compute financial inclusion index to include remittances and withdrawals. It also offers an alternative approach of computing an inclusive growth index. Further, it adds to the scanty literature on empirical analysis of the link between financial inclusion and inclusive growth. It also adds to the literature on mediation analysis by combining both the causal step and the bootstrap approaches to examine the mediating role of financial institutions on financial literacy and financial inclusion. This approach can be extended to study other relationships in order to provide a more insightful exposition. Finally, it makes a case for the need to broaden the scope of financial inclusion to include the activities of other non-bank financial institutions because they are channels for financial inclusion.