Financial inclusion: a catalyst for financial system development in emerging and frontier markets
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Date
2023
Journal Title
Journal ISSN
Volume Title
Publisher
Journal of Financial Economic
Abstract
Purpose – This study aims to examine the relationship between financial inclusion and financial system
development in emerging and frontier markets.
Design/methodology/approach – Using data across 35 countries over 19 years (2004–2022), the
improved GMM estimation technique reveals that financial inclusion significantly contributes to the
development of financial systems.
Findings – The study uses a segmented approach, dividing financial development indices into subindices:
financial depth, financial access and financial efficiency. Indicators of bank financial inclusion show a positive
and highly significant relationship with bank depth and access but a negative relationship with bank
efficiency. Similarly, indicators of the debt market and stock market financial inclusion demonstrate positive
relationships with market depth and access but negative relationships with debt and stock market efficiency.
The study further examines composite indexes of financial inclusion for bank, debt and stock market
segments, finding strong and highly significant relationships with market development. These results
underscore the importance of promoting financial inclusion across all segments of the financial sector to
achieve an inclusive financial system.
Practical implications – The implications of this research highlight the need for policymakers and
practitioners to implement policies and regulations that enhance financial inclusion and foster the
development of robust financial systems. By extending access to mainstream financial instruments and
services, financial institutions can stimulate financial intermediation and support, thereby accelerating the
development of the banking, debt and stock markets.
Originality/value – The study is robust to the use of several indicators of financial inclusion and financial
development, and it forms part of the early studies that examine the close relationship between the two
variables.
Description
Research Article
Keywords
Financial inclusion, Financial sector development, Bank market