Financial Inclusion, Remittance Inflows, and Poverty Reduction in Developing Countries

Evidence from Empirical Analyses

Takeshi Inoue, Shigeyuki Hamori

• Publisher: WSPC
• Year: 2019
• ISBN:
  9789813279100
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Many empirical analyses have demonstrated that financial inclusion and remittance inflows both indicate the potential of finance to resolve issues of growth and poverty in developing countries. Based on a wide-ranging review of prior research and empirical analyses from a new perspective, this book aims to systematically clarify the relations between financial inclusion, remittance inflows, economic growth, and poverty reduction in developing countries, revealing a new role for development finance.

Contents:

• About the Authors
• List of Abbreviations
• List of Figures
• List of Tables
• Introduction
• Financial Inclusion and Economic Growth: Is Banking Breadth Important for Economic Growth?
• Financial Inclusion and Poverty Reduction: Has Microfinance Been Helpful to Poor People?
• Remittance Inflows and Economic Growth: Clarifying Conflicting Results in the Literature
• Remittance Inflows and Poverty Reduction: How Economic Development Affects Remittances' Effect on Poverty Reduction
• Remittance Inflows and Financial Inclusion: Do Workers' Remittances Promote Access to Finance?
• Financial Inclusion, Remittance Inflows, and Poverty Reduction: Complements or Substitutes?
• Index

Readership: Students, professionals and researchers who want to understand the importance of financial inclusion and international remittances for economic development.Economic Growth;Financial Inclusion;Poverty Reduction;Remittances0 Key Features:

• Contains useful information on development finance, suggestions to alleviate poverty, and application of econometric methods

Chapter 1

Financial Inclusion and Economic Growth: Is Banking Breadth Important for Economic Growth?

1.1 Introduction

Country-level and regional-level research efforts have often demonstrated that financial development is an integral factor in a country’s economic growth (King and Levine, 1993; Demirgüç-Kunt and Maksimovic, 1996; Levine and Zervos, 1998; Graff, 2003) and that a positive bidirectional relationship exists between financial development and economic growth (Demetriades and Hussein, 1996; Luintel and Khan, 1999; Kirkpatrick, 2000; Apergis et al., 2007). In these various studies, the provision of financial intermediation is typically designated as “financial deepening.” This is defined as the increased scale of the financial sector in the real economy, such as bank credit, bank deposits, and/or monetary aggregates all normalized by a country’s GDP.

In contrast to the current body of knowledge, we empirically examine the role of finance in the economic growth of developing countries from the perspective of the so-called “financial inclusion.” Financial inclusion in general and financial access in particular are expected to promote the accessibility and convenience of financial services provided by financial intermediaries by establishing an extensive national network rather than by expanding scale. According to this concept, financial inclusion contributes to economic growth by reducing funding constraints and promoting the economic activities of individuals and companies that had been previously unable to use financial services. Although several types of intermediaries can be envisioned as major players in improved financial inclusion, the focus here is on commercial banks as traditional providers of financial services in developing countries.

Specifically, we construct proxy measures of the accessibility of financial services among users based on the number of commercial bank branches in terms of a demographic or geographic measure. We use panel data from 168 countries between 2004 and 2014 to estimate the effect of financial inclusion on economic growth. In addition, we consider the education level and macroeconomic variables, such as the investment ratio and economic openness, which have been accepted in related studies as important factors contributing to economic growth. Furthermore, instead of using measures of financial inclusion, we use traditional measures of financial deepening, such as the ratio of money supply to GDP and the ratio of credit to GDP, to confirm the effect of financial deepening on economic growth.¹

This chapter is organized as follows. Section 1.2 explains the relevant literature. Section 1.3 presents our model and Section 1.4 provides the definitions, sources, and properties of the data. Section 1.5 explains the empirical technique. Section 1.6 presents the empirical results. Section 1.7 summarizes the major findings.

1.2 Literature Review

In recent years, such phrases as “financial inclusion” and “finance for all” have been embraced as new policy objectives by international organizations including the World Bank, Asian Development Bank, and Group of 20 (G20), and by certain developing countries (e.g., Brazil, India, and Indonesia). The aim of financial inclusion is to allow everyone to receive the benefits of economic growth by creating an environment in which all potential users can access financial services. Beneficiaries include “unbanked” individuals who have not been offered financial services, such as credit, savings, and money wiring, and “underbanked” individuals who have not used financial services even though they have access to them.

As increasing attention has been paid to the subject of improving access and convenience of financial services in recent years, we have begun to observe the development of databases of related indicators. Some well-known databases include the Financial Access Survey (FAS) by the International Monetary Fund (IMF) and the Global Financial Inclusion Index (Global Findex) and Enterprise Surveys by the World Bank.² Analyses using these databases are currently underway to verify such increased access and convenience by country or region. For example, Demirgüç-Kunt and Klapper (2012a) use the World Bank’s 2012 Global Findex database to examine how adults in 148 countries save and borrow money, make payments, and manage risks during the year 2011. The authors report that approximately half the adult population worldwide remains unbanked and that at least 35% of adults face barriers to using bank accounts. Although these barriers vary based on regional and individual characteristics, high costs, physical distance, and lack of appropriate procedural documents are noted as the most common barriers.

Demirgüç-Kunt and Klapper (2012b) use the 2012 Global Findex database and Enterprise Surveys to examine the access of individuals and small and medium enterprises (SMEs) to banking in African countries. The authors find that less than a quarter of adults in Africa have an account with a formal financial institution and that many adults in Africa use informal methods to save and borrow. In addition, the authors find that most SMEs in Africa are unbanked and that access to finance is a major obstacle.

Allen et al. (2014) employ five measures of financial inclusion taken from the Global Findex database, as well as two measures of financial deepening and investigate the levels of financial inclusion and deepening in Africa. Using cross-country data of average values from 2007 to 2011, the authors find that the population density is more strongly linked to both financial inclusion and deepening in Africa than in other developing countries. Therefore, the authors conclude that “technological advances, such as mobile banking, have provided a promising way to facilitate African financial inclusion and deepening outside major cities” (Allen et al., 2014, p. 16).

Mialou et al. (2017) construct a composite indicator of financial inclusion for 30 countries from 2009 to 2012 using the IMF’s FAS database. The outreach dimension is measured by the number of automatic teller machines and branches per 1,000 km²; the usage dimension is measured by the number of borrowers and depositors of financial intermediaries per 1,000 adults. Factor analysis is applied to identify financial inclusion dimensions and to assign weights. Then, the authors derive the composite indicator from a nonlinear aggregation of intermediate dimensional indicators, finding that the top three countries in the composite indicator for 2011 and 2012 are Asia-Pacific nations and that eight of the bottom 10 countries are African nations.

As such, these studies have specifically elucidated regional characteristics, determinants, or barriers to financial accessibility rather than exploring the effect of financial inclusion on economic growth. Consequently, by examining this latter point, this study contributes to the existing literature.

1.3 Model

In neoclassical growth theory, as represented by Solow (1956), economic development is considered dependent on advances in technology; however, the technology level is an exogenous variable. Neoclassical growth theory has the following characteristics: (1) in the steady state, output per capita and capital stock per capita are considered fixed; (2) the savings rate is not influenced by the growth rate per capita over the long term, but it has a consistent effect on the rate of productivity per capita in the steady state; (3) two countries with identical rates of savings and population growth converge to an equilibrium value of output per capita. That is, the poor country develops more rapidly than the richer one. However, ultimately, both countries attain the same average productivity per capita.

In response to Solow, Romer (1986) called for a new theory of economic growth that accorded importance to the role of human capital and knowledge investment. This is known as the endogenous growth theory, in which technological development does not act exogenously but is an endogenous factor in capital stock development in the broad sense that serves as a cause of economic growth.

Rebelo (1991) explains endogenous growth theory based on his AK model. Production is expressed as follows:

Here, A is a constant that represents the productivity of capital stock, and K represents a broad understanding of capital that includes human capital and social infrastructure rather than just capital in its usual and narrowly material sense. The marginal productivity of this broad understanding of capital does not decrease and is assumed fixed as (A) here.

From Equation (1.1), we understand that

In Equation (1.2), ΔK is the broad understanding of capital. Assuming that this is equivale...

Table of contents

• Cover page
• Title page
• Copyright
• About the Authors
• List of Abbreviations
• Contents
• List of Figures
• List of Tables
• Introduction
• Chapter 1. Financial Inclusion and Economic Growth: Is Banking Breadth Important for Economic Growth?
• Chapter 2. Financial Inclusion and Poverty Reduction: Has Microfinance Been Helpful to Poor People?
• Chapter 3. Remittance Inflows and Economic Growth: Clarifying Conflicting Results in the Literature
• Chapter 4. Remittance Inflows and Poverty Reduction: How Economic Development Affects Remittances’ Effect on Poverty Reduction
• Chapter 5. Remittance Inflows and Financial Inclusion: Do Workers’ Remittances Promote Access to Finance?
• Chapter 6. Financial Inclusion, Remittance Inflows, and Poverty Reduction: Complements or Substitutes?
• Index