FOREIGN DIRECT INVESTMENT, FINANCIAL INCLUSION AND BANKING 

SECTOR DEVELOPMENT IN AFRICA. 

BY 

EVANS KWAKU AVOGADRO WEMEGAH 

(10806284) 

 

THIS THESIS IS SUBMITTED TO THE DEPARTMENT OF FINANCE, UNIVERSITY 

OF GHANA BUSINESS SCHOOL, UNIVERSITY OF GHANA, LEGON IN PARTIAL 

FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF MPHIL FINANCE 

DEGREE 

 

 

 

 

MARCH, 2022

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DEDICATION 

 

I dedicate this work to my beloved late father; Mr John Adzevia Wemegah and my original queen 

(mother); Miss Mary Mawuko Afi Kofi-Ekpor. 

 

 

 

 

 

 

 

 

                                                         

                                                                                                                      

                                                                                     

 

 

      

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ACKNOWLEDGEMENT 

 

My profound gratitude goes to God Almighty for the gift of life and strength. My heart is full of joy for 

your grace and mercy which have brought thus far. Ebenezer; this is how far you have brought me, 

LORD. Thank you for the morning of the finished thesis.  

Thanks to you my supervisors; Prof. Joshua Yindenaba and Prof. Mohammed Amidu                                                                        

for your special interest, great commitment and constructive critics of my work. Thank you to my 

siblings and Aunty Elizabeth Sogbaka who have supported me during this period of studies with their 

good counsels. Thank you to Rev. Fr Valentine Gregory Hlovor, Rev. Fr Anthony Ocloo and Rev.Fr 

Norbert Okoleda for their prayers and supports all these years. Thank you to the Finance Department 

and Faculty of University of Ghana Business School (UGBS) for the presentations which provided 

valuable inputs for this work and all my colleagues MPhil Finance and MPhil Risk Students. 

 A special thank you to; Evans Kojo Aidoo, Anita Emefa Doe, Newton Nborapoan Nathaniel and Dennis 

Venunye Hehetror for being wonderful friends throughout the whole MPhil journey.   

Thank you to everyone who has in one way or the other contributed to this work. I am eternally grateful 

for your support, encouragement, prayers and love and can only call heaven and earth to join me say 

thank you and God bless you.  

 

                 

 

 

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TABLE OF CONTENTS 

 

DECLARATION.............................................................................. Error! Bookmark not defined. 

CERTIFICATION ......................................................................................................................... i 

DEDICATION............................................................................................................................... ii 

ACKNOWLEDGEMENT ........................................................................................................... iv 

TABLE OF CONTENTS ............................................................................................................. v 

LIST OF TABLES ........................................................................................................................ v 

ABSTRACT ................................................................................................................................... x 

CHAPTER ONE ........................................................................................................................... 1 

INTRODUCTION......................................................................................................................... 1 

1.1RESEARCH 1BACKGROUND ............................................................................................. 1 

1.2 PROBLEM STATEMENT .................................................................................................... 6 

1.3 RESEARCH OBJECTIVES .................................................................................................. 9 

1.4 RESEARCH QUESTIONS .................................................................................................. 10 

1.5 SIGNIFICANCE OF THE RESAERCH ............................................................................ 10 

1.6 RESEARCH LIMITATION ................................................................................................ 11 

1.7 ORGANIZATION OF THE RESEARCH ......................................................................... 11 

CHAPTER TWO ........................................................................................................................ 12 

OVERVIEW AND STYLISED FACTS OF FOREIGN DIRECT INVESTMENT, FINANCIAL 

INCLUSION AND BANKING SECTOR DEVELOPMENT ................................................ 12 

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2.1 INTRODUCTION................................................................................................................. 12 

2.2.1 OVERVIEW AND STYLIZED FACTS ON FOREIGN DIRECT INVESTMENT ... 12 

2.2.2 OVERVIEW AND STYLIZED FACTS ON FINANCIAL INCLUSION ................... 16 

2.2.3 OVERVIEW AND STYLISED FACTS ON BANKING SECTOR DEVELOPMENT18 

2.4 CHAPTER SUMMARY ....................................................................................................... 20 

CHAPTER THREE .................................................................................................................... 22 

LITERATURE REVIEW .......................................................................................................... 22 

3.1 INTRODUCTION................................................................................................................. 22 

3.2 THEORETICAL FRAMEWORK ...................................................................................... 22 

3.2.1 ECLECTIC THEORY ................................................................................................... 22 

3.2.2 THEORY OF THE MULTINATIONAL ENTERPRISE (MNE) ............................. 23 

3.2.3 ENDOGENOUS OPTIMUM CURRENCY AREA HYPOTHESIS ......................... 24 

3.2.4 FDI - BANKING SECTOR DEVELOPMENT NEXUS ............................................ 24 

3.2.5 FDI - FINANCIAL INCLUSION NEXUS ................................................................... 25 

3.2.6 FDI -FINANCIAL INCLUSION- BANKING SECTOR DEVELOPMENT ........... 27 

3.3 EMPIRICAL LITERATURE REVIEW ............................................................................ 28 

3.3.1 THE EFFECT OF FDI ON FINANCIAL INCLUSION ............................................ 28 

3.3.2 THE EFFECT OF FDI ON BANKING SECTOR DEVELOPMENT ..................... 30 

3.3.3 THE INTERACTION EFFECT OF FDI AND FINANCIAL INCLUSION ON BANKING 

SECTOR DEVELOPMENT .................................................................................................. 32 

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3.4 CHAPTER SUMMARY ....................................................................................................... 33 

CHAPTER FOUR ....................................................................................................................... 34 

METHODOLOGY ..................................................................................................................... 34 

4.1 INTRODUCTION................................................................................................................. 34 

4.2 DATA AND SOURCES ........................................................................................................ 34 

4.3 THE MODEL SPECIFICATION ....................................................................................... 35 

4.4.1 MAIN VARIABLES ...................................................................................................... 39 

4.4.1.1 FOREIGN DIRECT INVESTMENT ........................................................................ 39 

4.4.1.2 MEASURING FINANCIAL INCLUSION INDEX FOR AFRICA ........................ 40 

4.4.1.3 MEASURING BANKING SECTOR DEVELOPMENT INDEX FOR AFRICA ... 43 

4.4.2 CONTROL VARIABLES ............................................................................................. 44 

4.4.2.1. INFLATION ............................................................................................................. 44 

4.4.2.2. HUMAN CAPITA DEVELOPMENT ..................................................................... 45 

4.4.2.3 GROWTH RATE ...................................................................................................... 45 

4.4.2.4. TRADE OPENNESS ................................................................................................ 46 

4.4.2.5. GOVERNMENT EXPENDITURE .......................................................................... 46 

4.5 ESTIMATION STRATEGY ............................................................................................... 47 

4.5.1 FIXED EFFECT MODEL (FEM) ................................................................................ 48 

4.5.2 RANDOM EFFECT MODEL (REM) ......................................................................... 48 

4.5.3 GENERALISED METHODS OF MOMENT ............................................................. 49 

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CHAPTER FIVE ........................................................................................................................ 51 

DISCUSSION OF EMPIRICAL FINDINGS ........................................................................... 51 

5.1 INTRODUCTION................................................................................................................. 51 

5.2 SUMMARY DESCRIPTIVE STATISTICS ...................................................................... 51 

5.3 THE CORRELATION MATRIX ....................................................................................... 54 

5.4 PCA RESULT USED IN CONSTRUCTION OF FINANCIAL INCLUSION INDEX . 56 

5.5 PCA RESULT USED IN CONSTRUCTION OF BANKING SECTOR DEVELOPMENT 

INDEX .......................................................................................................................................... 57 

5.6 THE INTERPRETATION AND DISCUSSION OF EMPIRICAL RESULTS ............. 61 

5.6.1 REGRESSION RESULTS OF THE EFFECT OF FDI ON FINANCIAL INCLUSION

 ................................................................................................................................................... 61 

5.6.2 REGRESSION RESULTS TO ASCERTAIN THE EFFECT OF FDI ON BANKING 

SECTOR DEVELOPMENT .................................................................................................. 64 

5.6.3 REGRESSION RESULTS OF THE INTERACTION EFFECT OF FDI AND 

FINANCIAL INCLUSION ON BANKING SECTOR DEVELOPMENT ........................ 68 

CHAPTER SIX ........................................................................................................................... 73 

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ............................................ 73 

6.1 SUMMARY OF THE STUDY ............................................................................................. 73 

6.2 CONCLUSIONS ................................................................................................................... 74 

6.3 POLICY RECOMMENDATIONS ..................................................................................... 74 

6.4 FUTURE RESEARCH ......................................................................................................... 76 

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LIST OF TABLES 

TABLE 4.1 DATA MEASURES AND SOURCE ................................................................................... 37 

TABLE 5.1 THE SUMMARY DESCRIPTIVE STATISTICS ............................................................... 52 

TABLE 5.2 CORRELATION MATRIX OF THE MAIN VARIABLES ................................................ 55 

TABLE 5.3 PRINCIPAL COMPONENTS OF FI ................................................................................... 56 

TABLE 5.4 ROTATED COMPONENT MATRIX (VARIMAX) .......................................................... 57 

TABLE 5.5 PRINCIPAL COMPONENTS OF BSD ............................................................................... 58 

TABLE 5.6 ROTATED COMPONENT MATRIX (VARIMAX) .......................................................... 59 

TABLE 5.7 AUGMENTED DICKEY-FULLER – FISHER TYPE UNIT ROOT TEST ....................... 59 

TABLE 5.8 HAUSMAN TEST FOR FIXED EFFECT AND RANDOM EFFECT ............................... 60 

TABLE 5.9 THE EFFECT OF FDI ON FINANCIAL INCLUSION ...................................................... 62 

TABLE 5.10 TO ASCERTAIN THE EFFECT OF FDI ON BANKING SECTOR DEVELOPMENT. 65 

TABLE 5.11 THE INTERACTION EFFECT OF FDI AND FINANCIAL INCLUSION ON BANKING 

SECTOR DEVELOPMENT ..................................................................................................................... 68 

TABLE OF LIST OF COUNTRIES....................................................................................................... 104 

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ABSTRACT 

This study set out to investigate the effect of foreign direct investment (FDI) on financial inclusion (FI) 

and Banking Sector Development (BSD) and the moderating role of FI on the FDI – BSD relationship. 

A balanced panel data of fifty- two African countries for a period of fourteen (14) years (2004 to 2017) 

was used in the study. The fixed and random effects model estimators together with system generalized 

methods of moment (SGMM) were employed. The discussion of the findings was based on the result of 

SGMM of respective objectives of the study. 

The results show that the FDI has negative statistically insignificant effects on financial inclusion. It has 

statistically significant positive effects on banking sector development. In addition, the interactive term 

of FDI and FI has negative but statistically insignificant impact on BSD. The study also revealed that 

financial inclusion decreases banking sector development in African countries. 

Building a good financial inclusion index and banking sector development index using principal 

component (PCA) analysis measurement method is important for developing countries like African 

countries. It helps to assess the level of FI and BSD of each country and between countries together, 

made easily and accurately for policies formulation and implementation. 

First, unlike previous studies, the author constructed composite indices for FI and BSD using Principal 

component analysis (PCA) to assign weights instead of using arbitrary weight or proxy to empirically 

investigate the relationships between FDI, FI and BSD in Africa. Second, using the interaction term 

between FDI and FI the author empirically analyzes whether, and to what extent, the banking sector 

development interact with each other in the process of poverty reduction

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CHAPTER ONE 

INTRODUCTION 

1.1RESEARCH 1BACKGROUND 

 

According to Agbloyor et al. (2014), foreign direct investment (FDI) and portfolio investment as component of 

private capital inflows is an important vehicle through which developing countries (Africa) growth problem can 

be addressed. Through a cautious critical analysis of the components of private capital flows,  show that FDI is 

the least volatile, as it is usually long term in nature and it’s potentially to be accompanied by technology and 

expertise (Prasad et al, 2003). In terms of the distribution of FDI across different countries, it is undeniable that 

FDI has flowed throughout Africa, but the majority of it seems to be concentrated in a few countries such as; 

Angola, Nigeria, Egypt, and South Africa which have attracted the most foreign direct investment to Africa. From 

1990 to 2010, these above mention countries had contributed closely to 53% of entire FDI flows to African 

countries. On the contrary, over the same period, certain African countries received less than 5% of total FDI 

inflows to Africa.  

The flow of foreign direct investment has expanded dramatically during the previous twenty years, and 

Africa has reaped the benefits. In reality, FDI increased from roughly $5 billion in the early 1990s to 

nearly $20 billion in the late 1990s, in all 53 countries in African. In comparison to a global mean 

growth rate of 20%, this amounts to a yearly mean growth rate of roughly 18% for the same period. In 

the 2000s, Africa continued to experience the rise of FDI inflows, rising from roughly $35 billion in the 

early 2000s to over $73 billion in 2008. Nonetheless, Africa has experienced a downward trend of FDI 

flows since 2009, falling from $60.2 billion to roughly $55 billion in 2010. This decline is owing to 

world financial crisis (United Nations Conference on Trade and Development, UNCTAD, 2010). The 

financial growth of both the source and destination countries has an impact on overall FDI flows. The 

sound financial intermediation of source countries may provide holding companies with easy access to 

external funds, allowing them to expand into new countries via overseas affiliates or the acquisition of a 

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local corporation (Desbordes and Wei, 2014). International affiliates should be able to access domestic 

financial markets for additional capital if the destination countries have a strong financial framework in 

place. Local firms may also benefit from the depth of their native country's financial system by 

providing them with suitable external funding to compete with multinational organizations (MNEs) (Ju 

and Wei, 2010). According to Bilir et al. (2019), solid domestic financial growth looks to have a direct 

positive influence on FDI inflows by sourcing foreign capital, but it is also likely to have an indirect 

negative impact on the same FDI by increasing local competitiveness. FDI flows may boost general 

economic activity, with financial institutions, particularly commercial banks, benefiting indirectly as a 

result of technological diffusion. With regard to endogenous growth model, which premises on the 

reasoning that FDI is accompanied by technology transfer, skills and training which augment 

technological advancement to attain economic growth in the long term (Kumar and Pradhan, 2002). 

Thus, many countries, especially the developing ones now put in policy measures so as to attract FDI 

inflows so as to rake in the associated benefits induced by FDI (Kaur et al., 2013). As a result, unlike 

private sector credit to GDP, the perceived advantage of FDI appears to be captured by commercial 

banks' performance metric (ROA), allowing for a more precise description of the dynamic linkage 

between bank-centric financial development and FDI inflows. 

 The past years have witnessed an increase in FDI inflows into the African countries, representing 39% 

of their external finance (Jaiblai and Shenai, 2019; Martins et al., 2021). A substantial body of studies 

tried to attribute this increase to several divergent factors (Ajide et al., 2022). For instance. Jaiblai and 

Shenai (2019) argued that the increase in FDI in Africa is attributed to better infrastructure, a lower 

income level, and a smaller market size. Development of the financial sector is one major absorption 

capacity, which must be established to enhance the inflows of FDI (Asong, 2014 and Adams, 2009). 

Omri and Kahouli (2014) revealed that Middle East and North African countries, as a result of ill-

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developed financial markets, did not benefit enough from FDI. On their part, Almfraji and Almsafir 

(2014) and Seenivasan (2014) provide evidence to the effect that development of the financial sector 

presents one sure conduit through which countries can reap the FDI-induced benefits 

 

Financial inclusion (FI) is defined in a variety of ways by various organizations. In a broad sense, FI 

refers to a population's ability to maintain a low-cost account with a financial intermediary that allows 

account users to save, make purchases through payment services, and borrow funds. Individuals who are 

not part of the financial system must rely on their meager savings to pay for their schooling or to fund 

potential income-generating ventures. Financial inclusion is critical to inclusive growth, proffering 

policy solutions to eradicate the barriers that exclude individuals and business from financial markets. 

Due to global momentum financial inclusion gained in the last two decades; African countries have 

made significant headway in promoting financial inclusion throughout the years. The emergence of 

various modern financial instruments in Africa, such as mobile money, has expanded the financial 

options available to the poor, young, rural inhabitants, and small and medium enterprises (SMEs) in the 

fight against poverty (Abor et al., 2018).  

Financial inclusion is a process that integrates disparate groups of people under one financial roof, 

allowing them to receive basic financial services, particularly those with extremely low incomes, the 

poor and marginalized groups, such as migrants. Not only do these services comprise banking products, 

but they also contain low-cost services like insurance, pensions, and remittances. In recent years, there 

have been two primary causes for the rising emphasis on financial inclusion. To begin with, (Gurley and 

Shaw, 1955; Goldsmith, 1969; Diamond and Dybvig, 1983; Greenwood and Jovanovic, 1990; Angadi, 

2003) believe that financial exclusion threatens economic growth. Second, policymakers have noted 

that, as a result of poverty reduction, financial inclusion can boost GDP (Cull et al., 2014). Financial 

inclusion's impact on growth, on the other hand, would be incomplete without a discussion of its links to 

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unemployment, poverty, and income inequality. People who are accessing banking services benefit by 

putting their money in reputable financial institutions, according to Mehrotra et al. (2009). High 

economic growth and greater per capita GDP are achieved as a result of the multiplier effect (Ghosh, 

2011). Several important empirical studies (Jeanneney and Kpodar, 2011; Beck et al., 2007; Clarke et 

al., 2006; Burgess and Pande, 2005; Honohan, 2004) have found that access to formal financial services 

is negatively connected to poverty and inequality. Financial inclusion has increasingly become a very 

topical among researchers, stakeholders and policymakers especially in developing nations. However, 

65% of adults in the poorest developing nations still lack access to a transaction account and only 20% 

save through a formal financial institution (Pazarbasioglu et al., 2020). According to the Global Findex 

report in 2017, only 33% of the adult population own a bank account at a formal financial institution in 

sub-Saharan Africa (SSA), which is less than any other region in the world (Demirguc-Kunt et al., 

2018). Primarily, financial inclusion begins with adults owning a transaction account which can be used 

to save money, send and receive payments (Demirgüç-Kunt et al., 2017). For low-income individuals 

and households, owning formal bank accounts involve inconveniences and high transaction costs (Beck 

& Demirgüç-Kunt, 2008; Karlan et al., 2016; Soumaré et al., 2016) but the availability of mobile 

telephony has helped to reduce the constraints, especially, in rural areas (Andrianaivo & Kpodar, 2011; 

Pazarbasioglu et al., 2020). 

The banking sector is one of the major important essential pillars of any country's economy because of 

the critical role it plays in enhancing the development and progress of the economic and financial 

sectors. The commercial banking sector's performance and progress are based on a number of factors, 

including profitability, expansion, and credit management behavior. The multi-dimensional concept of 

banking sector growth makes it difficult to identify just one definition of this process, as it is a multi-

step process that encompasses both quantity and quality advances in financial services. Savings 

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mobilization, credit issuance, and risk management are all aspects of the banking system. The ability of 

a bank to perform these functions efficiently is the criterion by which it is judged.  

Africa's banking system has experienced considerable reforms in the previous three decades, following a 

protracted period of poor performance. The banking sector of most African countries is underdeveloped 

despite series of reforms. Standley (2010) observes that most banking sector depth indicators in sub-

Saharan Africa are low compared to other regions of the world. The low institutional quality in most 

sub-Saharan African countries is a plausible reason for their lower levels of banking sector development. 

Anayiotos and Toroyan (2009) opine that the banks in majority of the sub-Saharan African countries 

conduct business within an environment characterised by weak institutional quality. A recent ranking by 

Krause (2016) shows that most countries in sub-Saharan Africa rank low on the institutional quality. The 

underdeveloped nature of banking sector of most sub-Saharan African countries is a plausible reason for 

the economic backwardness in the region.  

Banks act as intermediaries between borrowers and savers. As financial intermediaries, banks provide 

access, financial diversification and financial utilization to individuals and firms. Financial 

intermediation is seen as the extent to which financial institutions bring deficit spending units and 

surplus spending units together. Banks are able to effectively monitor borrowers and thus play the role 

of delegated monitoring. Reduced monitoring costs are a source of comparative advantage. Among other 

things, industrial reforms have resulted in the liberalization of interest rates and credit markets across the 

continent. In a number of African countries, interest rate controls have been replaced with open market 

activities. In order to reduce inefficiencies in the sector, state-owned banks have been privatized in large 

numbers (Fosu, 2013). As a result, commercial bank competition has piqued academic attention and 

continues to consume a huge amount of empirical study. The impact of banking rivalry on economic 

growth, on the other hand, has received little attention. 

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1.2 PROBLEM STATEMENT 

The effect of financial development on economic growth and FDI to economic growth has separately 

drawn a good number of researchers to investigate the issues. However, the studies investigating the 

direct linkage between financial development and foreign direct investment are still scarce (Hanif & 

Shariff, 2016; Hassan, Das, & Islam, 2016). Few numbers of researchers stressed upon to find the direct 

linkages. The few studies that have looked into the direct link between foreign direct investment (FDI) 

and financial development, particularly in emerging areas like Africa are also inclusive. The following 

examples are the few studies that have affirmed the research gap being identified. A study by Agosin 

and Mayer (2000) demonstrates varying effect of FDI on financial development for three emerging 

regions that is Asia, Latin America and Africa. Their results suggest that FDI tends to substitute 

financial development in Latin America, while it complements financial development in Asia. The 

results for African economies were inconclusive. Agosin and Machado (2005) also employed the GMM 

estimation technique to test the effect of FDI on financial development for 36 developing economies in 

Africa, Latin America and Asia from 1971 to 2000. Their results confirm crowding-out effect of FDI on 

financial development in Latin America and a neutral effect of FDI on financial development in Africa 

and Asia. David et al. (2014) in their studies using data from Sub Saharan African economies concluded 

that, there is no relationship between FDI and financial development. They however contend that trade 

openness (TO) is vital for financial development for economies characterised by quality institutional. 

Adeniyi et al. (2015) studied the causal relationship between FDI and financial development in Ghana, 

Gambia, Nigeria Cote’ d’Ivoire and Sierra Leone for the period of 1970–2005 by applying Granger 

causality tests. Measuring financial development by three variables – liquid liabilities/GDP, banking 

sector credit/GDP and credit to the private sector/GDP, the findings support the view that FDI matters 

for financial development in the economies considered except for Nigeria.  

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Researchers examined economic size and growth, institutional development, economic freedom, 

religion, cultural distance between nations, inflation, trade openness, financial development, tax rates, 

and physical infrastructure to establish the economic, social, and cultural determinants of FDI (Saini and 

Singhania, 2018; Anyanwu and Yameogo, 2015). Several empirical studies have been published on the 

assessment of which key determinants explain which countries (advanced countries, emerging countries, 

and least developed countries) attract the most FDI and understanding which factors are the most 

important predictors of FDI. But there is no general agreement insofar as some studies have not found 

any statistically significant relation with respect to certain determinants (Assunção et al 2011., Tocar, 

2018., Dimitrova et al., 2020). According to Coulibaly (2015), the empirical influence of FDI on 

financial development is limited, particularly in African countries where, despite the importance of FDI 

for host countries, the financial sector remains underdeveloped. Agbloyor et al. (2013) believe that 

increased FDI flows will lead to the development of Africa's local banking industry, based on the 2SLS 

panel instrumental variable technique. Soumaré and Tchana (2015) discovered that there is reverse 

causality between FDI and stock market development indicators after conducting an experimental 

investigation into the causal relationship between FDI and financial development indicators. On the 

other hand, the link between banking sector development indicators is fuzzy and confusing. FDI money 

is critical for expanding the banking sector's deposit base, which is then made available to the general 

population in the form of loans and other credit facilities. Since FDI is assumed to be routed through the 

banking sector to productive areas. It's uncertain if FDI boosts or stifles the banking sector's growth due 

to lack of consensus among the above mention studies.  

 The studies that tried to establish the relationship between FBI and banking sector development (BSD) 

empirically used a proxy of three or one measure to capture BSD. There is lack of consensus among 

researchers on the adequate measure to capture banking sector development and myriad of empirical 

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studies have used a single measure, commonly private sector credit to Gross Domestic Product (GDP). 

A single measure would not suffice to provide a comprehensive information on banking sector 

development (Svirydzenka, 2016). This is due to the multidimensional nature of banking sector 

development. Cihak, Demirgu¨ç-Kunt, Feyen, and Levine (2013) identify four dimensions of banking 

sector development which include depth, access, efficiency, and stability. This study addressed this gap 

by developing a composite index from six different measures of banking sector development, taking into 

consideration all dimensions of banking sector development. 

Financial sector development (FSD) and financial inclusion (FI) have been a hot topic among 

policymakers, academia, development partners, and global development financing organizations due to 

the enormous consequences they have on economic growth. Since FSD is becoming a more important 

source of finances, it continues to play an essential role in Sub-Saharan Africa, with consequences for 

financial inclusion, macroeconomic policy, and stability. Due to a lack of awareness of the bidirectional 

causality between the two, policymakers may target either financial inclusion or FSD as a policy goal 

when they are actually outcome variables of each other. In Sub-Saharan Africa, there is evidence of a 

reverse causality between financial inclusion and FSD. In this way, financial inclusion and FSD are 

mutually reinforcing. Unlike previous studies that suggested that financial inclusion could impede FSD 

as a result of subprime lending, this reverse causality has policy implications because financial inclusion 

and FSD are complementary rather than antagonistic (Khan, 2011). 

 The level of financial inclusion and FSD has a significant impact on each other. Increased financial 

inclusion could assist the boost of FSD since the number of individuals with access to finance is an 

indicator of the degree of financial inclusion, which also aids the development of the financial sector in 

an economy. In addition, the level of FSD influences the level of financial inclusion. In a study 

published in 2019 by Anarfo et al. discovered bidirectional causality between FSD and financial 

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inclusion in both the Sub-Saharan Africa countries sample and the entire Africa sample. Financial 

inclusion clearly drives FSD, and vice versa. This suggests that because FSD is a financial inclusion 

outcome variable, it should not be sought solely as a policy goal and vice versa. While policymakers 

continue to look to scholars for suggestions on how to effectively implement financial inclusion 

measures, there is a dearth of research in this area. Although the reverse causation between financial 

inclusion and FSD has been proven in the research above, it is unclear which component of financial 

sector development is responsible for that reverse causality. As a result, the goal of the research is to 

find an empirical link between banking sector development and financial inclusion. 

Due to the above skeptical in literature; this research has been motivated to empirically examine the 

effect of FDI on financial inclusion, banking sector development and both FDI and financial inclusion’s 

interactive effect on banking sector development in Africa. 

1.3 RESEARCH OBJECTIVES 

To establish the relationship between FDI and financial inclusion, as well as FDI and banking sector 

development, the study investigates the interaction effect of FDI and financial inclusion on banking 

sector development. The following are the specific research objectives: 

i. To examine the effect of FDI on Financial Inclusion (FI). 

ii. To ascertain the effect of FDI on Banking Sector Development (BSD). 

iii. To examine the interaction effect of FDI and Financial Inclusion (FI) on Banking Sector 

Development (BSD). 

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1.4 RESEARCH QUESTIONS 

The following research questions are established to guide the study in order to fulfill the study's 

objectives: 

i. What is the effect of FDI on Financial Inclusion? 

ii. What is the effect of FDI on Banking Sector Development? 

iii. What is the interaction effect of FDI and Financial Inclusion on Banking Sector Development? 

1.5 SIGNIFICANCE OF THE RESAERCH  

The majority of researches in the literature have concentrated on financial inclusion, financial 

development, and economic growth, which has some skepticism. In the literature, there has been no 

study of the effect or influence of FDI on financial inclusion. Although considerable research has been 

done on the influence of FDI on income inequality and other aspects of financial inclusion, the results 

are inconclusive. As a result, the focus of this research will be on the overall impact of FDI on financial 

inclusion. 

Furthermore, the literature has given little or no attention to the influence of FDI on the development of 

the banking sector. The vast majority of FDI, financial development, and economic growth research 

have discovered faults. In fact, this study focuses on the impact of FDI on bank-based financial 

development (banking sector development). 

The study, as the first of its kind, is expected to provide a solid foundation for policymakers and 

economic players to use FDI to improve financial inclusion and banking sector development in Africa 

and other developing countries, thereby raising living standards and eradicating unemployment and 

poverty. It would also serve as a foundation and direction for future research projects. 

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1.6 RESEARCH LIMITATION 

The study focuses primarily on the impact of FDI on FI and Banking Sector Development, and the 

interaction effect of both FDI and FI on Banking Sector Development in Africa, and hence cannot be 

applied to difficulties in other regions of the world. The main limitation to this study is the unavailability 

of sufficient data for all the African countries used in the study. Since the results of the study shall be 

generalized to cover all countries within Africa, although there is no sufficient data available for all 

countries within the period under study. The study is somehow new so not getting substantial amount of 

literature to support it, will constrain the generalization of the study. 

1.7 ORGANIZATION OF THE RESEARCH 

The research is divided into six chapters. The research background, problem statement, research 

objectives, and research questions, as well as the significance of the research, research limitations, and 

research structure, are all included in Chapter 1. The Chapter 2 presents introduction, overview and 

stylized facts of FDI, FI and banking sector development in Africa and chapter summary. The Chapter 3 

contains the literature review, which consist of introduction, theoretical framework, empirical literature 

review of FDI, financial inclusion and banking sector development and chapter summary. The Chapter 4 

presents the research methodology employed for the study. And it consists of data and sources, 

estimation strategy, the model specification and variable description. The Chapter 5 presents discussion 

of empirical findings. It outlines are; introduction, summary descriptive statistics, correlation matrix, pca 

result used in construction of financial inclusion index, pca result used in construction of banking sector 

development index, correlation matrices of regression variables, diagnostic test, the interpretation and 

discussion of empirical results. The Chapter 6 consists of the summary of the study, conclusions, policy 

recommendations and future research. 

 

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CHAPTER TWO 

OVERVIEW AND STYLISED FACTS OF FOREIGN DIRECT INVESTMENT, FINANCIAL 

INCLUSION AND BANKING SECTOR DEVELOPMENT 

2.1 INTRODUCTION  

 

This chapter presents an overview of the Foreign Direct Investment (FDI), Financial Inclusion (FI) and 

Banking Sector Development in Africa (BSD) as a whole. It also presents stylized facts as well as trends 

of Foreign Direct Investment, Financial Inclusion and Banking Sector Development in African countries 

with the aim of setting the study within in a context. The overview talks about the importance and the 

roles of foreign direct investment, financial inclusion and banking sector development in Africa. In 

stylized facts, the metamorphosis and trends of FDI, FI, and BSD are enumerated. 

2.2.1 OVERVIEW AND STYLIZED FACTS ON FOREIGN DIRECT INVESTMENT 

 

For globalization and the global economy, FDI is a critical component. It is a catalyst for job creation, 

technical advancement, productivity gains, and eventually the acceleration and sustainability of long-

term economic growth. The vital role that FDI plays in developing nations in terms of development, 

investment, foreign exchange, and tax revenue is evidenced by the fact that it fills gaps in development, 

investment, foreign exchange, and tax revenue (Smith, 1997; Quazi, 2007). Transferring modern 

technology, integrating into the global economy, increasing domestic savings, creating and growing 

jobs, improving efficiency, developing local suppliers, and improving local people's abilities are all 

examples of how FDI can aid Africa's development efforts (Dupasquier and Osakwe, 2003; Anyanwu, 

2006). Furthermore, by acting as a stimulus for economic diversification and providing a large source of 

long-term finance for infrastructure and other developmental projects, FDI is assisting African countries 

in moving beyond their over-reliance on natural resources. These countries' recent economic policies 

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reflect this understanding. Mostly if not all, some African countries have changed their economic 

policies to improve their investment climate and promote their enterprises in order to attract more 

money. Economic reforms initiated and endorsed by the World Bank and the International Monetary 

Fund in the early 1990s permitted multinational corporations to enter Africa. To achieve this, African 

countries have offered significant incentives, such as significant tax reductions for foreign investments 

in a range of important sectors and extensive incentive packages for international investors. FDI inflows 

to African countries have remained disappointing despite all of these efforts. In the previous two 

decades, FDI flows to African countries have dropped in relative terms after expanding in absolute terms 

(Onyeiwu and Shrestha, 2004). One of the most likely acceptable explanations for African countries' 

failure to attract substantial quantities of FDI is their inability to combine economic changes with 

political and institutional reforms in order to build effective institutions and improve governance. 

According to Ngowi (2001), Africa has attracted little foreign direct investment since most African 

countries are perceived as high-risk by foreign investors due to a lack of political and institutional 

stability and predictability. Using fixed and random-effect models based on a panel dataset for 29 

African nations from 1975 to 1999, Onyeiwu and Shrestha (2004) analyze whether the stylized 

determinant of FDI influences FDI flows in traditional ways to Africa. The most important determinants 

driving FDI flows to Africa have been identified as economic growth, inflation, trade openness, 

international reserves, and natural resource availability. Political rights and infrastructure, on the other 

hand, have been found to have no impact on FDI flows to Africa. Asiedu (2002) looked into whether the 

factors that influence FDI flows into Sub-Saharan African (SSA) countries are the same as those that 

influence FDI in rising markets. She looked at cross-section data from 71 developing countries and 

discovered that some characteristics that are crucial for FDI flows to developing countries aren't as 

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important for FDI flows to sub-Saharan Africa. Two examples are the rate of return on investment and 

improved infrastructure.  

FDI is desired around the world for its ability to facilitate technological transfers, create jobs, increase 

domestic output, and expand international market networks, among other things. The dynamic and rapid 

improvements in technological change have propelled the steady rise in FDI with growing integration 

between countries around the world during the last two decades. FDI to developing countries has 

expanded dramatically over the last decade, according to the World Bank (2001), growing from $24 

billion (24 percent of total foreign investment) in 1990 to $178 billion (61 percent of total foreign 

investment) in 2000. Despite the fact that this is wonderful news, Africa did not benefit from the FDI 

boom despite its best efforts. This is particularly true for countries with limited access to international 

capital markets. For example, FDI into Africa increased by 59 percent between 1980 and 1989 and 1990 

to 1998. This is disproportionate when compared to the large increases of 455 percent in Latin America 

and the Caribbean, 5,200 percent in Europe and Central Asia, 740 percent in South Asia, 942 percent in 

East Asia and Pacific, and 672 percent in all emerging countries. Actual FDI inflows into all African 

countries increased steadily from $5 billion to $20 billion from the early 1990s to the late 1990s. In 

comparison to the global average growth rate of 20%, this equates to an annual average growth rate of 

around 18% for the same time period. Foreign direct investment (FDI) into African countries increased 

considerably in the early 2000s, from roughly $35 billion to nearly $73 billion in 2008, and has 

continued to expand. Nonetheless, as a result of the international financial problems, African countries' 

FDI flows have been dropping in 2009 and 2010. FDI flow decreased from $73 billion in 2008 to $60.2 

billion in 2009, and then further decreased to around $55 billion in 2010. (UNCTAD, 2010). Even 

though FDI flows globally have been rising but is not at the same rate as compare to the pre-global 

financial crisis periods according to the World Investment Report, 2011. Specifically, in 2010 it rose to 

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$1.24 trillion which is about 15 per cent below the pre-crisis average (UNCTAD, 2011). In 2010, MNC 

operations added nearly $16 trillion in value to the global economy, accounting for one-quarter of global 

GDP. Multinational firms' foreign affiliates account for one-third of global exports and over 10% of 

global GDP. Foreign direct investment into Africa fell by 9% in 2010. In 2010, Africa got 4.4 percent 

($55 billion) of overall global FDI inflows, down from 5.1 percent in 2009.However, the primary sector, 

particularly the oil industry, continues to dominate the attraction of FDI flows to the African continent. 

Though FDI flows to the oil industry have increased, inflows to Angola and Nigeria have decreased. But 

the story for Ghana is different; it has risen as a major host country. The northern Africa political 

uprisings (Arab springs) and the indecisions of Nigeria’s petroleum industry bill and political instability 

in the Niger Delta served as inhibitions to foreign investors. With regard to the relationship within 

African countries is no doubt how regional FDI is generating significant positive developments to the 

host countries. For instance, in Zambia the state of agriculture is regenerated through the foreign 

investments in agriculture. 

In order to attract this regional foreign investment in services, agriculture, as well as the banking and 

finance industry; other countries have provided incentives as a catalyst (UNCTAD, 2011). FDI flows to 

Africa climbed by 11% from 2017 to 2018, hitting $46 billion, but remain below the 10-year average 

($50 billion), according to (UNCTAD, 2019). Resource-seeking investments, a continuous expansion of 

various investments in a few economies, and a more than doubling of FDI flows to South Africa (from 

$2 billion to $5.3 billion) all contributed to the expansion. The potential for expansion in Africa is the 

key motivator for investment. Until recently, Africa had been growing steadily and has been one of the 

world's fastest-growing areas for several years (IMF, 2013). Despite the decline in FDI, multinational 

companies continue to see Africa as a potential investment destination. Africa received $42 billion in 

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foreign direct investment in 2017, (UNCTAD, 2018). The United States, the United Kingdom, and 

France are the top three (3) investors in Africa, followed by China.  

2.2.2 OVERVIEW AND STYLIZED FACTS ON FINANCIAL INCLUSION 

African countries have focused their efforts on reducing poverty, inequality, and unemployment in order 

to achieve their socioeconomic goals. Despite the continent's tremendous economic expansion since 

1990s, inequality, poverty, and unemployment remain high (African Development Bank, 2018). For the 

past two decades, the extent to which financial systems and institutions are covered has been a key topic 

of discussion around the world. This hot topic is the term "financial inclusion" or "financial exclusion," 

which has received a lot of attention (Bhanot et al., 2012; Hasnol et al, 2013). Financial inclusion refers 

to how vulnerable and low-income individuals are included in a country's financial services so that they 

are not left out of financial products and services (Sinclair, 2013). Financial inclusion has been 

designated as a means of attaining seven (7) of the United Nations' seventeen (17) Sustainable 

Development Goals (SDGs) to secure prosperity for people and the planet, hence policy measures must 

be enacted to assure its effectiveness in African countries (Klapper et al., 2016). African countries have 

made significant progress in promoting financial inclusion throughout the years. The emergence of 

various modern financial instruments in Africa, such as mobile money, has expanded the financial 

options available to the poor, youth, rural inhabitants, and small and medium businesses (SMEs) in the 

fight against poverty (Abor et al., 2018).  

Africa is a continent with enormous potential and a wide range of options. Its burgeoning youth 

population and fast urbanization have attracted a slew of new investors. Exchange rate changes and a 

drop in commodity prices, on the other hand, have caused uncertainty in the region. Furthermore, 

African GDP growth is among the highest in the world, despite the fact that it began from a relatively 

low base. The continent's economies saw one of the longest consecutive periods of high growth (over 

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6% on average) in history during the 2000s. The majority of African countries are wracked by extreme 

poverty and unacceptably high unemployment rates. It's also important to remember that most residents, 

especially in the past, have been financially disadvantaged. This exacerbates the economy's underlying 

imbalances. Financial inclusion has been regarded as a major element of socio-economic development in 

Africa in order to address financial difficulties and lower the extent of shadow banking. In most African 

countries, it is a major policy priority aimed at alleviating poverty and establishing new economic 

prospects for possible job creation and youth employment (Varghese and Viswanathan, 2018). Financial 

inclusion has lately been adopted and incorporated into the financial system framework by Africa's 

central banks, with a variety of financial legislation and reforms aimed at bringing low-income people 

into the official financial system. The framework serves as a road map for Africa's financial system's 

development, with the purpose of developing innovative financial products, a more efficient payment 

system, more inclusive lending regulations, and encouraging a savings culture. Simultaneously, most 

countries establish Microfinance Bank Policy, which acts as a framework for promoting financial 

inclusion at the grassroots level. The most major barrier to financial inclusion, according to Zins and 

Weil (2016), is a lack of funds. They believe that the African continent is in the vanguard of mobile 

money banking, particularly in East Africa, where more than 73 percent of Kenyans are mobile money 

consumers, after analyzing the World Bank's worldwide findex database on 37 African nations to 

generate Probit calculations. They went on to say that 36 of the 54 countries in Sub-Saharan Africa had 

signed up for mobile banking services. Almost 2.5 billion people in low-to-middle-income nations do 

not have access to banking services. They also show how Africans save differently than people in other 

parts of the world. That is, the primary motivations for saving in Africa are for school (21.3%), farm or 

company (19.6%), and old age (10.3 per cent). While relatives and friends are the most common source 

of credit in Africa, official accounts only account for 6.7 percent of total borrowing. In 2011, for 

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example, financial inclusion in Sub-Saharan Africa was slightly over 23%. It was over 43% in 2017, 

with digital financial services accounting for a large portion of the rise. In Africa, the majority of adults 

today have access to a formal banking system. Youths were able to find work and start businesses as a 

result of this progress. Micro and medium enterprises now have access to simple banking transactions, 

which has resulted in a reasonable amount of growth, job creation, and poverty alleviation. Financial 

inclusion has opened up options in terms of technology, allowing businesses to better their database 

analytics and start new businesses (Okpara and Koumbiachs, 2009; ADB report, 2018).  

2.2.3 OVERVIEW AND STYLISED FACTS ON BANKING SECTOR DEVELOPMENT  

 

The banking industry is vital to the growth of the economy (Bushman, 2014). Indeed, the manner in 

which a financial system distributes capital to potential investment opportunities has a large and positive 

impact on long-term economic growth (Levine, 2005). The recent 2008 financial crisis, which began in 

the banking sector, highlighted the banking industry's importance in the macroeconomic climate, as well 

as the importance of accurate reporting and good regulation. Over the previous thirty years, a great 

majority of Africa's 10 countries have implemented a series of financial reforms to grow the continent's 

banking system. State-owned banks were reformed, a monetary policy framework was established, a 

financial regulatory and supervisory framework was established, interest rate controls and lending 

ceilings were eliminated, and capital account liberalization was implemented (Motelle and Biekpe, 

2014). In 1980, for example, South Africa repealed credit restrictions and interest rate controls. 

Furthermore, in 1995, the financial rand exchange control system for non-residents was removed. 

Citizens' exchange limitations were also modified in 1997, allowing them to invest a limited amount of 

money overseas and maintain foreign currency accounts with local institutions. Ghana began its reform 

effort in 1987 with the partial liberalization of interest rates, which was followed in 1988 by the removal 

of sectoral credit limitations. These patterns were found in all ten Frontier African countries. The limited 

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banking sector development in most African countries is owing to their geographic location and 

population density. Huang (2010a) claims that geography has an impact on both the demand and supply 

sides of the financial sector's development. Land extent, lack of access to the coast and rivers that flow 

into the sea (landlocked), and population density are all likely factors in the banking sector's growth. 

According to Beck and colleagues, countries near the equator have a higher prevalence of undeveloped 

financial systems than those farther away (Beck et al., 2003a). Countries with bigger geographical areas 

have lower levels of financial sector growth, according to Huang (2010a). Landlocked countries' 

banking sector development may be hampered by limited access to ocean water transportation, limited 

access to external commerce, and greater transportation costs of goods compared to non-landlocked 

countries. According to Allen et al. (2014), population density is more essential in Africa than in other 

parts of the world for the development of the banking sector. According to them, several African 

countries' banking systems are undeveloped as a result of their low population density. 

Banking sector provides opportunities for income production, savings, investments, and loan 

availability, and is critical to economic development, particularly in developing countries (Otchere et al., 

2017). As part of IMF and World Bank-assisted structural adjustment attempts in the 1990s, the majority 

of African countries liberalized their banking systems. The restructuring and privatization of state-

owned banks, as well as the lowering of lending ceilings and interest rate deregulation, are among the 

most significant measures. The financial systems of Nigeria, Malawi, Botswana, South Africa, and the 

Seychelles are all well-capitalized and innovative (Allen et al., 2011). Africa's principal source of 

external financing is banks. However, the financial sectors of most African countries remain 

underdeveloped (Otchere et al., 2017), and poor institutional quality in many countries may play a role. 

Due to economic, political, and cultural differences, Africa's banking system differs despite many 

similarities. Central banks and deposit-taking institutions make up the majority of Africa's banking 

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sector (local banks and international bank branches or subsidiaries). Despite their seeming independence 

from government power, central banks aid governments in designing and implementing macroeconomic 

policies (Allen et al., 2011). In Dakar, Senegal, the countries of French West Africa, in particular, have a 

joint Central Bank of West African States. In most countries, state-owned banks or a few large banks, 

some of which are multinational, dominate the banking sector. Indeed, multinational banks' presence in 

many African countries has assisted banking sector development by raising competition and introducing 

banking techniques such as corporate governance and innovation (Nyantakyi and Sy, 2015). 

Geographical factors, according to Huang, can influence both the demand and supply sides of financial 

sector development (2010a). Land area, lack of access to the coast and rivers that flow into the sea 

(landlocked), and population density are all likely factors in the banking sector's development. As they 

approach closer to the equator, countries with a less developed financial system are more likely to 

experience it (Beck et al., 2003a). According to Huang, countries with larger geographical areas have 

lower levels of financial sector growth (2010a). Landlocked countries have limited access to ocean 

water transportation, which could stifle banking sector growth due to a lack of external trade or greater 

commodity transportation costs than non-landlocked countries. According to Allen et al., the 

development of the banking business in African countries is more dependent on population density than 

in other parts of the world (2014). They say that the undeveloped financial systems in several African 

countries are due to low population density. 

2.4 CHAPTER SUMMARY 

 

Foreign direct investment (FDI) is a driver for economic diversification in Africa, allowing the 

continent's economy to shift away from natural resource dependence. FDI inflows to Sub-Saharan 

Africa (SSA) increased by 59 percent from 1980 -1989 to 1990 -1998. From the early 1990s to the late 

1990s, actual FDI inflows into all African countries climbed consistently from roughly $5 billion to 

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around $20 billion. Compared to a global average growth rate of 20%, this equates to an annual average 

growth rate of around 18% for the same time period. FDI flows to African countries have steadily 

climbed since the early 2000s, growing from around $35 billion in 2000 to around $73 billion in 2008. 

Despite substantial economic growth throughout the 1990s, inequality, poverty, and unemployment 

remain high in Africa, according to the African Development Bank's (2018) study. The level of coverage 

of financial systems and institutions is a big subject that has acquired a lot of traction in the recent two 

decades around the world. As former United Nations Secretary-General Kofi Annan put it, FI is a 

critical public policy goal and a worldwide socioeconomic development panacea. “The stark reality is 

that most poorer people in the world still lack access to sustainable financial services, whether it is 

savings, credit or insurance. The great challenge before us is to address the constraints that exclude 

people from full participation in the financial sector. Together, we can and must build inclusive financial 

sectors that help people improve their lives.” 

The financial sector plays a crucial part in the growth of the economy (Bushman, 2014). The devastation 

wrought by the global financial crisis of 2008, which originated in the banking sector, underlines the 

banking sector's importance in the macroeconomic environment and emphasizes the importance of 

correct reporting and regulation. The majority of African countries have launched a series of financial 

reforms in order to expand the continent's banking industry over the previous three or four decades. The 

reform process included the restructuring of badly run state-owned banks, the creation of a new financial 

regulatory and supervisory framework, a new monetary policy framework, the removal of interest rate 

controls and lending ceilings, and capital account liberalization (Motelle and Biekpe, 2014) 

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CHAPTER THREE 

LITERATURE REVIEW 

3.1 INTRODUCTION  

 

Theoretical and empirical literature reviews of FDI, financial inclusion (FI), and banking sector 

development (BSD) are all included in this chapter. The theoretical literature discusses various theories 

that underpin the study, while the empirical literature reviews some related studies done around the 

world in relation to FDI, FI, and BSD, particularly those done in Africa, in order to put the study and its 

findings in proper perspective.    

3.2 THEORETICAL FRAMEWORK 

 

Many hypotheses have been proposed to explain the behavior of FDI, financial inclusion, and the 

development of the banking sector. Electric Theory, Theory of the Multinational Enterprise (MNE), and 

Endogenous Optimum Currency Area Hypothesis are among the theories considered significant for this 

study. 

3.2.1 ECLECTIC THEORY 

 

The FDI theory (also known as the OLI paradigm) was proposed by Dunning (1993/2000). The three 

kinds of criteria in the paradigm determine whether a company, industry, or corporation is a source of 

foreign direct investment or a host of it. Ownership benefits, locational considerations, and 

internalization are the three categories. Ownership benefits are those that are specific to the business. 

Expanding into the home market could be an alternative method because the company has such a 

competitive advantage over both domestic and global competition. Technology, size and diversification, 

management and organizational skills, access to or control over raw materials, the ability to enlist the 

political support of their government, access to favorable financing terms in both foreign and domestic 

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markets, and the ease with which the firm can shift production between two countries are all examples 

of such advantages. 

Transportation costs for finished goods and raw materials, import restrictions, the company's ability to 

operate in another country, ownership benefits that combine profitability with factor endowments in 

other countries, tax policies in both the source and host countries, and political stability in the 

destination country are all considered. Internalization gains are the factors that a corporation analyzes 

that make conducting transactions within the organization rather than relying on external marketplaces 

more advantageous. Market flaws (uncertainty, difficulty of control, economies of scale, and 

information asymmetry to a prospective customer, are examples) must be avoided in order to realize 

such profits. However, the existence of ownership advantages is, to some part, the bedrock on which 

internalization gains clearly rely. The eclectic theory of FDI is predicated on the fact that all three types 

of circumstances must be met before FDI can occur.  

3.2.2 THEORY OF THE MULTINATIONAL ENTERPRISE (MNE) 

 

The notion of the multinational enterprise (MNE) dominates the international literature on banks' 

worldwide growth, explaining why multinational banks provide transaction services through direct 

presence rather than through the free market (Gray & Gray, 1981; Grubel, 1977; Sabi, 1988; Williams, 

1997). Efficiency improvements (or X-efficiency) can be gained in the form of lower costs or increased 

revenues, according to the larger international banking literature. Indeed, geographic expansion allows 

banks to enter new markets when domestic growth is limited (for example, the latter justified 

globalisation of Japanese economic environments, thus reducing variation in the organizations' earnings 

(Aggarwal & Durnford, 1989; Berger & DeYoung, 2001); and to exploit internationally high domestic 

market to book ratios, as the easy availability of capital appears to provide bankers with a significant 

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competitive edge (Aliber,1984). (Marr, Rogowski, & Trimble,1989; Aggarwal & Durnford, 1989; 

Berger &DeYoung, 2001); and to take advantage of internationally high domestic market to book ratios 

(Aliber, 1984), because easy access to capital appears to give bankers a significant competitive 

advantage in global markets (Aggarwal & Durnford, 1989; Berger & DeYoung, 2001); and (Marr, 

Rogowski, and Trimble, 1989.) 

3.2.3 ENDOGENOUS OPTIMUM CURRENCY AREA HYPOTHESIS 

  

Barriers to trade, according to Mundell, who popularized this thesis in 1973, led to an increase in foreign 

direct investment inflow. Foreign direct investment capital market theory is another name for it. To 

overcome a trade barrier between countries, the Endogenous Optimum Currency Area Hypothesis is 

offered. It is thought that for any business entity to overcome such a barrier, it is necessary for such an 

entity to incur the risk of entering the target country, establish up business machineries for production, 

and make products or services available for sale, which is the best alternative. The Toyota of Japan 

vehicle production factory in the United States, which makes Lexus cars, fits within Mundell's 

Endogenous Optimum Currency Area Hypothesis, which allows foreign autos to avoid US obstacles 

(Louangrath, 2014). The similar method is used at Nissan Motors of Japan's production unit in the 

United States, which makes Infinity automobiles. Foreign investment, according to Makoni (2015), 

arose as a result of capital market flaws in general. While this capital market theory holds true in 

developed countries such as the United States, the United Kingdom, and Canada, later researchers have 

challenged it for ignoring basic currency risk management concepts (Makoni, 2015). 

3.2.4 FDI - BANKING SECTOR DEVELOPMENT NEXUS 

 Foreign direct investment to African economies improves the availability of domestic capital which 

serves as the launch of transition process of the financial system of these economies (Lane and 

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Mcquade, 2014). The development of the banking sector as a result of capital availability through 

takeovers and greenfield investment is good evidence to the effect that access to credit is improved 

(Elekdag and Wu, 2011). Foreign investors interact with domestic banking agents. The extent to which 

foreign investors as well as domestic investors can appreciate and adopt new technologies due to FDI is 

partly dependent on their relationship with their bankers. FDI in itself may help overcome the credit 

constraints faced by local firms in developing countries (see Zakaria, 2007). Another dimension to the 

FDI–bank nexus is that this relationship may determine whether FDI is undertaken in the first place and 

the subsequent volume of future FDI. For example, Klein et al. (2002) find that in response to 

deteriorations of domestic banks’ financial health in the early 1990s, Japanese firms cut back on US 

direct investment substantially. They also posit that financial conditions of creditors, especially banks 

with which firms have developed close relationships, drive FDI by changing the availability of credit. 

FDI money is critical for expanding the banking sector's deposit base, which is then made available to 

the general population in the form of loans and other credit facilities.  

When foreign firms enter into  a domestic economy, they make use of the domestic financial markets. 

They will most likely open a local bank account. When they have funds in their accounts, the bank can 

then use part of those funds for their lending activities. Due to the fact that these enterprises are big 

accounts for banks, a lot of funds become available to the banking sector to intermediate. These 

enterprises are also more likely to demand higher quality internationally comparable services. The 

presence of these foreign investors should promote domestic banking sector development. 

 3.2.5 FDI - FINANCIAL INCLUSION NEXUS 

Although there are no established theoretical and empirical relationships between FDI and Financial 

inclusion (FI) in the literature to the best knowledge of the author, the theoretical intuition supports that 

an increase in FDI inflow will result in a subsequent rise in money supply into the economy which will 

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increase the financial intermediation. A well-developed financial system can act as a sign of validity, 

openness, and market-friendly environment, which subsequently attracts foreign investors, hence 

remarkable economic development which will spillover to businesses and individuals in the economy. 

Financial inclusion has been a significant focus for policymakers, industry leaders, and academics (Iram 

et al. 2020; Ahmad et al. 2022). This is because everyone stands to gain from widespread access to 

financial services. Most people agree that increased access to the financial system is a powerful weapon 

in the fight against poverty and narrowing the wealth gap.  

 It is essential to state that, FDI brings with it technological expertise. Multinationals are deemed to have 

a superior technology relative to domestic firms (Markusen, 2002), hence, FDI inflow by acquisition, 

joint venture or other capital transfer methods may result in the setting up of foreign technology in the 

domestic firm. These developments could manifest themselves in increasing innovative activity that 

would result in an improved access to credit by businesses. Examination of the relevant literature will 

show that most of the statistics go in the direction that inclusion decreases financial limitations for both 

people and enterprises, increases income and aids in economic growth, and lowers poverty rates. 

 Consequently, increase in FDI inflows could change the access to credit opportunities for domestic 

firms (Harrison and McMillan, 2003). Girma et al. (2008) found FDI inflow to various sectors level to 

be positively related with domestic innovative activity and improve access to domestic finance. Many 

nations realize that expanding access to financial services is crucial to fostering long-term growth that 

can support the economy (Kim et al. 2017). The term “financial inclusion” refers to the availability and 

use of formal banking services, both of which are necessary for individuals and enterprises to be called 

“financially included” (Chiu and Lee 2020; Hasan and Liu 2022). More people will be able to utilize the 

services and products supplied by financial institutions. Due to the high level of efficiency and 

technological expertise and advancement that FDI brings, more people are encouraged to join formal 

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financial institutions The term “financial inclusion” is often used to describe the effort to increase the 

availability of banking and other financial services to those living in low-income and underprivileged 

areas. 

3.2.6 FDI -FINANCIAL INCLUSION- BANKING SECTOR DEVELOPMENT 

FDI inflows to African economies are expected to supplement domestic savings mobilization to achieve 

the desired level of growth. However, FDI has been argued to play a complementary role by providing 

financial resources vital for boosting access to credit by the private (Mbulawa,2015). According to the 

study of Iram et al. (2020) suggested that people who have access to a wide range of financial services 

are more likely to save money and make better use of their savings. The impact of capital available on 

the long-term viability of Armenia’s small and medium-sized enterprises (SMEs) was studied by Jalil 

and Feridun (2011). According to Zhang et al. (2021), an inclusive financial system may increase low-

interest deposits, which can help banks save money on their marginal funding costs and provide them 

with more bargaining leverage in the money market. If banks establish an inclusive financial system to 

increase low-interest deposits, these potential advantages of financial inclusion might be realized. This 

would happen if more people have access to financial services due to the positive effect of financial 

inclusion. 

 The inflow of foreign investment to certain hitherto isolated areas may attract financial services to these 

areas which may markedly improve financial inclusion. Greater improvement in financial inclusion by 

way of access to financial services can also further attract FDI bringing about bidirectional causality 

between financial inclusion and FDI. The same scenario can also hold for banking sector development 

as the inflow of foreign capital can greatly stimulate the provision of credit facilities to these 

investments by banks in order to partake in their investment returns. These banks can also create 

financial incentives to attract foreign capital which thus brings about financial and sustainable 

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development to the economy in which they are operating. Several arguments have been made for why it 

is vital to aim toward a higher degree of financial inclusion. These arguments help to paint a picture of 

how financial inclusion could contribute to monetary security. From a macroeconomic perspective, more 

readily accessible credit might mean that banks and other financial institutions have access to more 

funding. The banking and finance industries may benefit when more people have access to credit, and 

more people can join the economy, which has a multiplier effect that helps the economy grow that 

benefits all segments of society 

3.3 EMPIRICAL LITERATURE REVIEW 

There is no evidence on the study of the effect of FDI on financial inclusion (FI) as well as the 

interaction effect of FDI and financial inclusion on the banking sector in the literature. But there are few 

studies that exist on the area of interest. Despite the paucity of empirical evidence on the effects of FDI 

on banking sector development in the literature; they are also inconclusive. A few of these studies are 

reviewed here.  

3.3.1 THE EFFECT OF FDI ON FINANCIAL INCLUSION 

FDI inflow is an important factor for economic growth, and many countries try to attract it. The 

advantage of foreign direct investment might be by way of information and technology overflow, job 

creation, and business development. The technology transfer, the job creation and business development 

through FDI increases accessibility and provides financial services at a low cost to the unbanked and 

poor people of the country, including educating and encouraging them towards financial services. The 

promotion of an inclusive financial system is a policy priority in many countries in recent years (Sarma, 

2012), which highlights the issue of financial inclusion—means that all economic agents have access to 

formal financial services and can use such services effectively (Ahamed & Mallick, 2019). 

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Klapper and Singer (2015) looked into and confirmed the use of informal savings and borrowing 

methods in African countries in the literature. Financial innovation, such as mobile money due to 

technological advancement by the presence of FDI aims to increase financial inclusion by allowing the 

middle class, women, the poor, the less educated, rural settlers, and the unemployed to use financial 

services at any time. Previous research has suggested that people's demographic and socioeconomic 

have characteristics an impact on financial inclusion in developing countries, and these findings support 

that idea. Financial inclusion has been shown to increase growth by eliminating poverty, according to 

policymakers (Cull et al., 2014). Social factors such as gender and the location of financial services have 

a substantial impact on financial inclusion in a developing country like Uganda, according to recent 

research by Irankunda and Van Bergeijk (2019).  

The study took into account other demographic factors such as age, marital status, and educational level. 

Due to the relevance of financial inclusion on economic growth, Soumare et al. (2016) study the factors 

that influence financial inclusion in Central and West Africa. Gender, age, education, income, home 

location, marital status, and work status are all considered key factors in financial inclusion in Africa's 

central and western sub-regions, and the findings of this study are consistent with previous research. The 

size of the household and the level of trust in financial institutions are two more socioeconomic factors 

that influence financial inclusion in both sectors. According to a prior study by Demirguc-Kunt and 

Klapper, individual characteristics such as income, education, and trust are drivers of financial inclusion 

in Africa (2012a, b). Low account maintenance costs, geographic accessibility of financial 

intermediaries, and fewer document requirements for account opening are all factors that impact the 

decision to utilize a financial service (Allen et al., 2012).  

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3.3.2 THE EFFECT OF FDI ON BANKING SECTOR DEVELOPMENT 

FDI is believed to be a crucial determinant of credit growth and a cause of credit booms (Lane and 

Mcquade, 2014; Calderon and Kubota, 2012; Mendoza and Terrones, 2012; Elekdag and Wu, 2011; Sa, 

2006; Hernández and Landerretche, 2002). There are strands of diverse empirical studies that exist in the 

literature about the effect of FDI on banking sector development with findings that report contradictory 

results. Starting with some few studies that found a positive impact of FDI on banking sector 

development in the literature.   

Foreign direct investment to African economies improves the availability of domestic capital which 

serves as the launch of transition process of the financial system of these economies (Lane and 

Mcquade, 2014). The development of the banking sector as a result of capital availability through 

takeovers and greenfield investment is good evidence to the effect that access to credit is improved 

(Elekdag and Wu, 2011). FDI helps overcome the credit constraints faced by local firms in developing 

countries (see Zakaria, 2007). Agbloyor et al. (2013) believe that increased FDI flows will lead to the 

development of Africa's local banking industry, based on the 2SLS panel instrumental variable 

technique. Oteng-Ababio et al. (2016) investigated the effect of FDI on the banking sector performance 

using some selected banks in Ghana. The study confirmed a positive and significant correlation between 

FDI, banks' capital base and the liquidity of the selected banks in Ghana. 

The presence of foreign banks, according to Gamariel (2015), promotes competition while also forcing 

domestic banks to pursue efficiency goals in order to stay profitable. FDI inflows, according to Konara 

et al. (2019), provide foreign and domestic banks with a variety of volumes and types of efficiency 

improvements. Sissy et al. (2017) discovered evidence of a favorable relationship between foreign bank 

presence and bank risk adjusted profits earned by diversification in 38 African countries. Foreign banks, 

they argue, force local banks to diversify into previously untapped areas, non-traditional banking 

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operations, and product innovations in order to increase profitability and stability. Furthermore, 

empirical research using de facto financial integration indicators often shows that the latent benefits of 

increased international capital mobility, as well as higher participation rates, improve bank profitability 

in general (Mishkin, 2007). Similarly, Pohl (2011) shows that as a result of foreign bank entry, technical 

and regulatory spillovers improve the efficiency and profitability of African banks.  

Touching on other empirical studies which also reports negative impact of FDI on banking sector 

development in the World and Africa in the literature. Hanif and Shariff (2016) contend that there is no 

established theory to confirm the relationships between FDI and financial development. The increased 

money supply will flow through the two main veins of the financial system, namely the baking system 

and stock market, which will increase the financial intermediation. On the other hand, a well-developed 

financial system acts as a sign of validity, openness, and market-friendly environment, which attracts 

foreign investors. Based on cointegration and granger causality techniques Hanif and Shariff (2016) 

empirically studied a five economies panel from ASEAN zone namely, Malaysia, Indonesia, Singapore, 

Thailand, and the Philippines, for a period from 1990 to 2011. Their study finds that the FDI and 

banking sector of the ASEAN panel does not cause each other meaning that there is little evidence that 

FDI can boost the banking sector of ASEAN economies. On the contrary, they also found a bidirectional 

causal relationship between financial development and FDIs which partially supports his theories.  

A similar relationship is investigated by Soumaré and Tchana (2015) who analyzed 29 emerging 

economies for the time span of 1994-2006. They empirically found a very positive and significant 

bidirectional relationship between FDI and stock market indicators while FDI and banking indicators are 

found to be ambiguous and inconclusive. An inadequate banking system, according to Antras et al. 

(2009), pushes foreign and domestic companies to rely excessively on external sources, resulting in 

foreign firms' activities being constrained and low economic growth.  

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3.3.3 THE INTERACTION EFFECT OF FDI AND FINANCIAL INCLUSION ON BANKING 

SECTOR DEVELOPMENT 

 FDI can solve problems commonly faced by the banking industry, such as financial product shortage 

and inefficient management, and create more effective risk management tools and financial product 

development (OECD, 2002; Magnus et al., 2008). According to Alfaro (2003), foreign direct investment 

is not only a source of capital supply but also a source of transferring useful technology and know-how 

to the host countries through promoting connection with local countries' enterprises. If transferred 

technology is used in the financial sector, it can act as an instrument to improve a platform that helps to 

broaden the financial services in access areas. Also, technology helps banks decrease their cost to 

increase the reachability of the financial service to customers, which increases the financial inclusion of 

the banks. Reforms in the financial sector, for example, have been shown to boost competitiveness in 

East Africa's banking sector (Yildirim and Philippatos, 2007; Berger et al., 2009; Mugume, 2007). A 

well-developed banking sector, according to Schumpeter (1911), provides capital to firms, which they 

may utilize to manufacture new products and drive technological innovation and economic growth. 

Foreign banks from more sophisticated regulatory frameworks, according to Mishkin (2007), encourage 

prudential regulatory measures, which improve the general health of the domestic banking sector's 

development. 

Banks with greater stability may broaden financial services to underbanked sectors of the economy: 

sectors that rely more on external finance, and that are naturally composed of small firms for 

technological reasons. If market frictions–e.g., transaction costs and informational opacity–hinder small 

firms and firms that are heavy users of external finance to get access to credit, higher levels of financial 

inclusion will ameliorate these frictions and will aid in the faster growth of firms, which in turn leads to 

higher economic growth. IMF et al. (1991) and Meyer (2001) discuss that FDI supplies an important 

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source of investment funds for the public and private sectors, contributing to managerial skills, new 

technology, and capital and promoting competition. The financial sector is always the key sector for the 

overall development of any country, and the banking sector is the primary sector among all. Baladevi et 

al. (2019) evaluate the impact of financial inclusion on the banking sector in India. The study found that 

FDI has solved the banking sector's problems, like risk management, low capitalization, and stability 

problems. Also, it mentions that FDI has a buoyant impact on the banking sector through technology 

transfer, financial soundness, innovative products, and employment 

3.4 CHAPTER SUMMARY 

 The critical and careful examination of literature, as well as the gaps in empirical research, led this 

study of the influence of FDI on FI and to determine the effect of FDI on BSD, as well as the interactive 

effect of FDI and FI on BSD. According to research, FDI is the most effective vehicle for economic 

development in Africa and plays a vital role in financial progress. Some research has been done to 

empirically establish the relationship between FDI and financial development, as well as how FDI 

inflows can help the banking sector develop. Adam and Tweneboah (2009), Agbloyor et al. (2013), 

Antras et al. (2009), Kaur et al. (2013), Otchere et al. (2016) Other research, such as Allen et al. (2012), 

Beck and Cull (2013), Soumare et al. (2016), Irankunda and Van Bergeijk (2019), looked into the 

determinants and social elements that influence financial inclusion because FI is important for 

humanity's socioeconomic growth. 

 

 

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CHAPTER FOUR 

METHODOLOGY 

4.1 INTRODUCTION   

This chapter presents the methodology for the study which is the methods and procedures employed to 

achieve the stated objectives. The chapter started with the data and sources with their measures, type and 

period of the data and the number of the countries used in the study and their scope. The model 

specification used for the achievement of the set objectives is being stated and the empirical works that 

serve as the source of motivation for its choice has also been outlined. It has further discussed the 

variables utilised in study into details by specifying those that are independent, dependent and control. 

Some of the variables were used to construct indices by employing the principal component analysis 

(PCA) to make the findings robust and justifiable for easy adoption by national and international 

research communities and policymakers. The estimation strategies used in the study are fixed and 

random effects. These estimators are briefly discussed for their relevance and shortfalls.  

4.2 DATA AND SOURCES 

The study uses a quantitative case study research design to analyze the objectives; effect of FDI on 

Financial Inclusion (FI), to determine the effect of FDI on Banking Sector Development (BSD), and the 

interaction effect of FDI and Financial Inclusion (FI) on Banking Sector Development. The World Bank 

Development Indicators (WDI) and the Global Financial Development (GFD) Database provided 

secondary panel data for the study, which was obtained through content analysis. Panel data from fifty-

two (52) African countries was studied between 2004 and 2017 due to unavailability of some of the data 

from 2018 and beyond.    

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4.3 THE MODEL SPECIFICATION  

The study uses the model employed by Adjasi et al (2012) and Agbloyor et al (2014) to analyze the 

influence of FDI on FI, as well as the effect of FDI on BSD and the interaction effect of FDI and FI on 

BSD in Africa. The following is a model comparable to Alfaro et al. (2004) and (Buam, 2009): 

Yit = βo + βj Xit + ∑ 𝛽𝑁
𝑗 jXit + ԑit                                                                                                        1                                                                             

Where: Yit is the dependent variable of country i at the time t, with i = 1 …., N; t = 1 …., T; 

 j = 1…., N; βo is an intercept, βj is parameter estimation of the independent variable, and the vector of 

control variables, Xit is independenet variable(s); ∑ 𝜷𝑵
𝒋 jXit is the vector of control variables.  

     Equation (1) is transformed into the following specific models; 

D.FIIit=βo+β1DFIIit-1+β2FDIit+β3INFit+β4HCDit+β5D.TOit+β6GVE+β7D.UNit+β8GR + ԑit            2   

BSDIit = βo + β1BSDIit-1 +β2FDIit + β3INFit +β4HCDit+ β5D.TOit +β6GVEit+ 

                      Β7D.UNit+β8GR+ԑit                                                    3     

To capture the interactive effect between FDI and financial inclusion model 1 is re-estimated and 

introduce an interactive term between FDI and financial inclusion index. 

BSDIit = βo +β1BSDIit-1+ β2 FDIit + β3D.FIIit +β4(FDIit x FIIit) +β5INFit+β6HCDit+ 

                      Β7 D.TOit+β8GVEit+ Β9 D.UNit +β10 GRit+ԑit                                                            4 

Where:  

Βo is the intercept, Β1 – β10 is parameter of estimation, D.FIIit is the first difference of financial inclusion 

index for country i at time t, D.FIIit-1 is lag one level of first difference of financial inclusion index for 

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country i at time t,  FDIit is net foreign direct Investment inflows as percentage of GDP for country i at 

time t, BSDIit and β1BSDIit-1 represent banking sector development index and it’s lag one level 

respectively for country i at time t, (FDIit x FIIit) is the interaction effect between foreign direct 

investment for country i at time t and financial inclusion index for country i at time t. The significance of 

the introduction of this interaction terms is to ascertain the marginal effects (net effects) of FDI on the 

rate of  banking sector development  which largely depends on FI  Africa countries. And INFit, HCDit, 

GRit, D.TOit, GEit and D.UNit represent; inflation, human capital development, growth rate, first 

difference of trade openness, government expenditure and first difference unemployment of country i at 

time t respectively, and ԑit is the error term. 

To properly interpret the interaction terms, there is a need to include the mean level of financial 

inclusion index (FII) for the study period (Brambor et al., 2006). For instance, based on equation (4), the 

effect of a change in FDI on banking sector development index (BSDI) is given by: 

                                
𝜕(∆𝐵𝑆𝐷𝐼)

𝜕(∆𝐹𝐷𝐼)
= β2 +  β4 (𝐷. 𝐹𝐼𝐼)𝑖𝑡                                                                    5 

 

Where β2 is the coefficient of the independent effect of FDI on BSDI, β4 is the coefficient of the 

interaction between FDI and FII and (FII) is the mean value of financial inclusion index over the periods 

under study. In interpreting the net effect computed, we compare the coefficients of the independent 

impact of FDI on BSDI to the coefficients of the marginal or net effects computed to draw a conclusion.  

 The net effect of FII on banking sector development index (BSDI) is investigated with key interest of the 

moderating role of FDI over the study period. To do this, the interaction effect of FII on the level on the 

level of BSDI from equation (4) again, for instance is computed by; 

                               
𝜕(∆𝐵𝑆𝐷𝐼)

𝜕(∆𝐷.𝐹𝐼𝐼)
= β3 +  β4 (𝐹𝐷𝐼)𝑖𝑡                                                                     6                                                           

 

 

 

 

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4.4 VARIABLE DESCRIPTION 
 

The variables used in study are organised into two categories; main variables and control variables. 

Foreign direct investment, financial inclusion and banking sector development are the main variables. 

The control variables include; inflation, human capital development, growth rate, trade openness, 

government expenditure and unemployment. 

TABLE 4.1 DATA MEASURES AND SOURCE 

TABLE 4.1 shows variables and their measures, and sources. WDI is World Development Indicator. GFD is 

Global Financial Development. 

  

VARIABLE 

 

    MEASUREMENT 

 

DATA 

SOURCE 

 

FOREIGN DIRECT 

INVESTMENT (FDI) 

 

Net FDI inflow as a percentage of GDP 

 

WDI 

 Bank account per 1000 adults (BA). GFD 

FINANCIAL 

INCLUSION INDEX 

(FII)) 

 

Automated Teller Machine (ATM) per 100000 

adults (ATM). 

 

WDI 

 Commercial banks branches per 100000 adults 

(CBB) 

WDI 

 Borrowers from commercial banks per 1000 

adults (BCB) 

WDI 

 Depositors with commercial banks per 1000 WDI 

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adults (DCB) 

 Gross domestic savings as a percentage of 

GDP (GDS) 

WDI 

BANKING SECTOR 

DEVELOPMENT 

INDEX (BSDI) 

Domestic credit to private sector by banks as 

percentage of GDP (DCPSB) 

WDI 

 Private credit by depositor money bank to as 

percentage of GDP (PCDMB) 

WDI 

 Deposit money banks’ assets to GDP (DMBA) GFD 

 Deposit money bank assets to deposit bank 

assets plus central bank assets as percentage 

(DMBACBA) 

GFD 

 Domestic credit to private sector as percentage 

of GDP (DCPS) 

GFD 

INFLATION (INF) GDP deflator (annual %) WDI 

GROWTH RATE(GR) GDP per capita growth (annual %) WDI 

HUMAN CAPITAL 

DEVELOPMENT(HCD) 

School enrollment, secondary (% gross) WDI 

TRADE OPENNESS 

(TO) 

 Sum of the exports and imports as a 

percentage to GDP. 

WDI 

UNEMPLOYMENT 

(UN) 

Percentage of total labour force WDI 

   

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GOVERNMENT 

EXPENDITURE (GVE) 

General government final consumption as 

percentage of GDP. 

 

WDI 

 

4.4.1 MAIN VARIABLES 

 

The variables considered as main variables are; foreign direct investment (FDI), financial inclusion (FI) 

and banking sector development so far as this study is concerned 

4.4.1.1 FOREIGN DIRECT INVESTMENT 

 

This study's primary independent variable is FDI inflow. FDI can be characterized in a variety of ways. 

For example, the International Monetary Fund (IMF) (1993) defines FDI as an investment made to gain 

fixed advantages in firms operating beyond the investor's own country. FDI is also characterized as 

private capital flows from a parent business in the enterprise's home nation to the enterprise (Pajunen, 

2008). FDI is defined by Bradley (2005) as the foundation of a new company in a foreign country. 

According to Cavusgil et al. (2012), FDI is a company's internationalization strategy that involves 

owning productive assets such as capital, land, plant and equipment, technology, and labor in a foreign 

country. According to Bronzini