The study uncovers the causal relationship between financial inclusion and economic growth via the intermediating role of institutional infrastructure for a panel of twenty sub-Saharan African countries between 2004 and 2013. Owing to the limitations that characterized the use of pooled OLS, fixed and random effect models, we employ the System Generalized Method of Moment (GMM), to investigate the impact of financial inclusion with good institutional settings for sustainable growth in SSA. The empirical findings are based on two financial inclusion indicators (access to ATMs and ICT measures) and four governance variables (economic, political, institutional and general). The five insightful outcomes emanate from the study, and they are: (a)on average, the unrestricted positive impact of physical access to ATMs and ICT measures of financial inclusion on SSA growth is established but the former is found to be significant at 0.05 critical value; (b) the both unbundled and bundled institutional variables viz: economic, political, institutional and general governances are established to be growth-spurring; (c) the effects on output growth associated with the interaction of financial inclusion and governance are positive for physical access measures but mostly otherwise for ICT measures; (d) countries with low levels of real per capita income are matching up with other countries with high levels of real income per capita; and (e) other factors that significantly influence output growth are capital investment, openness to trade and government consumption.
The findings are consistent with past studies like Andrianaivo and Kpodar (2011), Lundqvist and Erlandsson (2014) who have investigated the importance of financial inclusiveness of the poor through ICT penetration to the overall growth in sub-Saharan African countries. We further established that physical access to ATMs as a means of making financial services easy, cost-effective and inclusive to the less privileged, contributes to SSA’s growth. The study reveals that the relevance of financial inclusion to growth was enhanced by the prevailing institutional framework in the region. The empirical evidence of some insignificant marginal impacts are indications that imperfections in the financial markets are sometimes employed to the disadvantage of the poor. Some of the reasons were noted by FinMark (2009) that many Africans rely on informal financing because they were not financially included. On the whole, we established positive effects on growth for the most part. The positive effects are evident because the governance indicators compliment financial inclusion in reducing pecuniary constraints hindering credit access and allocation to the poor that deteriorate growth. This is consistent with Goodwin-Groen (2012) in the viewpoint that
financial sector policies have been influenced by quality institutional settings to support economic growth. The findings equally show that countries with low income are moving-up with other SSA countries with high level of income. Hence, supporting income convergence theory. These are in accordance with previous studies (like Solow, 1956; Swan, 1956;
Baumol, 1986; Mankiw, Romer, & Weil, 1992; Barro & Sala-i-Martin, 1995; Fung, 2009;
Narayan, Mishra and Narayan, 2011; Bruno, De Bonis, and Silvestrini, 2012; among others) that have documented same within the framework of neoclassical growth models.
In light of these emanating outcomes, a few policy prescriptions are advanced. First, efforts should be intensified towards promoting inclusive financing. This can possibly be achieved by easing access to banking services, which can be availed through electronic banking services and via other internet-related services. Second, well thought-out institutional reforms should be strengthened via different governance dimensions earlier identified. More specifically, economic and institutional governance structures should be further enhanced as their magnitudes of impacts are more visibly pronounced. The growth recipes (that is financial inclusion and institutional infrastructure) should be independently pursued as synergy between the duo may help in discounting growth-enhancing potentials inherent in such region like SSA.
Beyond this, future efforts should be geared towards unveiling other means of capturing financial inclusion and institutional infrastructure as there is no general agreement as to the correctness of the measures used since they have come under severe criticisms. There is room for future studies to extend empirical literature by focusing on country-specific trends on how institutions tend to reinforce the relationship between financial inclusion and growth.
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