The nexus between mobile phones diffusion, financial inclusion and economic growth: evidence on African countries.

Abstract

The following thesis comprises three discrete empirical essays on the interplay among mobile phones diffusion, financial inclusion and economic growth in Africa. The first essay examines the condition of financial inclusion and its determinants in Africa. Using the World Development Indicators and the Principal Component Analysis to compute the financial inclusion index for 49 African countries over the period 2004 to 2016, the study finds low levels of financial inclusion in Africa compared to other regions. The region is also characterised by large financial inclusion gaps as shown by the minimum and maximum financial inclusion levels of 0 percent and 82 percent respectively. Since policymakers have over the past decade embraced both financial inclusion and economic growth as key policy initiatives, the second essay examines the interplay between financial inclusion and economic growth in terms of the transmission effect and nature of causality. To the best of the researcher’s knowledge, this is the first study to explore the transmission effect between financial inclusion and economic growth using a unique and robust Cointegrated Panel Structural Vector Autoregressive model. The study finds the existence of a cointegrating relationship between financial inclusion and economic growth. It also provides evidence that the relationship between financial inclusion and economic growth in Africa is growth-led supporting the demand following hypothesis. The increased internet-enabled phones adoption in Africa has also caused much optimism and speculation regarding its effects on financial inclusion. Policymakers, various studies and the media have all vaunted the potentials of mobile phones for financial inclusion. Therefore, this study examines the interplay between mobile phones and financial inclusion in Africa for the 2004-2016 period using pairwise Granger causality test and found that mobile phones Granger cause financial inclusion. The literature on financial inclusion has identified high-quality institutions and governance as the determinants of financial inclusion. Lack of deeper understanding of these issues results in ill-informed policy designs. Despite the cascading literature on issues impacting financial inclusion, the empirical literature on the impact of institutional quality and governance on financial inclusion are rare. Therefore, the third essay evaluates the impacts of institutional quality and governance on financial inclusion in Africa. Applying the two-step system generalised method of moments model, the study finds a positive relationship between institutional quality, governance and financial inclusion, indicating that good governance and economic freedom can lead to increases in financial inclusion. The study concluded that African countries have low levels of financial inclusion with a strong relationship between financial inclusion and other variables such as mobile phones diffusion, bank competition, financial stability, institutional quality and governance. The study recommended institutions to make the most out of the high concentration of the rural population to rollout high-volume transactions, rather than clustering in areas with the high-value transaction and to craft policies that remove restrictions to entrance in the banking sector thereby enhancing bank competition. Policymakers should also not just focus on enhancing financial inclusion, without corresponding improvements in institutional quality, governance, financial sector size, financial stability and financial sector development as they positively contribute to financial inclusion. The study also recommended the implementation of pro-growth policies and a review of existing banking sector policies to eradicate unnecessary barriers to financial inclusion.