Digital financial inclusion and inclusive development in lower-middle-income countries: the enabling role of institutional quality
| Date | 22 July 2024 |
| Pages | 133-151 |
| DOI | https://doi.org/10.1108/JCEFTS-02-2024-0017 |
| Published date | 22 July 2024 |
| Author | Josephine Ofosu-Mensah Ababio,Eric Boachie Yiadom,Daniel Ofori-Sasu,Emmanuel Sarpong–Kumankoma |
Digital financial inclusion and
inclusive development in lower-
middle-income countries: the
enabling role of institutional
quality
Josephine Ofosu-Mensah Ababio and Eric Boachie Yiadom
Department of Banking and Finance, University of Professional Studies,
Accra, Ghana, and
Daniel Ofori-Sasu and Emmanuel Sarpong–Kumankoma
Department of Banking and Finance, University of Ghana, Legon, Ghana
Abstract
Purpose –This study aims toexplore how institutional quality links digitalfinancial inclusion to inclusive
developmentin lower-middle-income countries, consideringheterogeneities.
Design/methodology/approach –The study uses dynamic generalizedmethod of moments to analyze
a balanced panel data set of 48 lower-middle- income countries (LMICs) from 2004 to 2022,sourced from
various databases.It assesses four variables and conductschecks for study robustness.
Findings –The study revealsa positive link between digital financialinclusion and inclusive development
in LMICs, confirming theoretical predictions. Empirically, nations with quality institutions exhibit greater
financial anddevelopmental inclusion thanthose with weak institutions,emphasizing the substantialpositive
impact ofinstitutional quality on theconnection between digitalfinancial inclusion and inclusivedevelopment
in LMICs. For instance, the interactioneffect reveals a substantial increase of 0.123 in inclusive development
for every unitincrease in digital financial inclusionin the presence of strong institutions.The findings provide
robust empiricalevidence that the presence of quality institutions is a key catalystfor the benefits of digital
financein inclusive development.
Originality/value –This study offers significant insights into digital financial inclusion and inclusive
development in LMICs. It confirms a positive relationship between digital financial inclusion and inclusive
development, highlighting thepivotal role of institutional quality in amplifying thesebenefits. Strong
institutionsbenefit deprived individuals, families, communitiesand businesses, enabling full access to digital
financial inclusionbenefits. This facilitates engagement in developmentprocesses, aiding LMICs in achieving
SustainableDevelopment Goals.
Keywords Digital financial inclusion, Inclusive development, Institutional quality,
Lower-middle- income countries (LMICs)
Paper type Research paper
1. Introduction
The United Nations’Agenda2030 Sustainable Development Goals (SDGs) are a widelyused
global framework for inclusive development, inspiring action for sustainable and inclusive
outcomes. Embracing equitable development, it asserts every person’s pivotal role in
transforming societies, ensuring better outcomes (USAID, 2023; Pouw and Gupta, 2017).
Digital
financial
inclusion
133
Journalof Chinese Economicand
ForeignTrade Studies
Vol.17 No. 2/3, 2024
pp. 133-151
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-02-2024-0017
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1754-4408.htm
Amidst a growing focus on growth, scholars are recognizing the positive impact of digital
financial inclusion and institutional quality (Aracil et al.,2022;Aslam et al., 2021;Ghouse
et al.,2022;Zhu, 2022). Yet, empirical research on their joint influence on inclusive
development remains scarce, warranting an investigation into the relationship between
institutional quality,digital financial inclusion and inclusive development in LMICs.
The study acknowledges global progress in extending financial services, yet 1.4 billion adults
lack access (Global Findex, 2021). Despite efforts, financial inclusion for marginalized
populations remains insufficient, prompting concerns for inclusive policies and integrating
unbanked populations (Ferrata, 2019). Financial policy reforms, transitioning from repressed to
integrated systems, highlight digital financial inclusion’s significance for inclusivity (Ferrata,
2019). Lower-middle-income countries (LMICs) enact reforms for inclusive development, but
global progress remains uneven, with advanced economies benefiting more, leaving
LMICs behind in inclusive development. The study underscores the urgency of addressing this
disparity for comprehensive and sustainable global development. Digital finance, encompassing
services via ATMs, the internet, or mobile devices, provides avenues for payments, savings,
remittances, insurance and credit (Manyika et al., 2016;Gomber et al., 2017). This convergence of
financial inclusion and digitalization manifests as digital financial inclusion (Wang et al.,2023),
empowering deprived individuals, households and businesses through accessible services.
Literature recognizes digital financial inclusion as a vital enabler of inclusive economic
development (Ababio and Yiadom, 2023;Mondal, 2020;Siddik and Kabiraj, 2020).
Previous studies have explored the implications of inclusive finance for growth and
development (Corrado and Corrado, 2017), includingtheimpact of digital inclusive finance
on regional economic growth and innovation-drivendevelopment (Wang et al.,2023;Ababio
et al.,2023). While some investigations scrutinize the relationship between financial
inclusion and inclusive growth (Ofosu-Mensah Ababio et al.,2023;Aslam et al.,2021;
Demirgüç-Kunt and Singer,2017), none systematically examine the effect of digital financial
inclusion on inclusivedevelopment in LMICs.
This study aims to fill this gap by empirically examining the impact of digitalfinancial
inclusion on inclusive developmentin LMICs. It contributes valuable insights into the role of
digital financialinclusion in fostering inclusive development, particularly in LMICs.
The research delves into the intersection of digital financial inclusion, institutional quality
and inclusive development, emphasizing their role in achieving SDGs 8 and 10. Success
depends on optimizing tradeoffs or synergies between digital financial inclusion and other
developmental targets, particularly institutional quality. SDG 16 underscores the importance of
strong institutions as an enabling tool for implementing ideas and policies, fostering digital
financial inclusion and propelling inclusive development, thus contributing to SDG 15 success.
In LMICs, a lack of institutional support hinders development opportunities for the poor.
Effective institutions become the empowering tool for digital financial inclusion, enabling
marginalized populations to access services through the internet, e-cards, mobile phones or
other digital networks. Aslam et al.’s (2021) study explores institutional quality, social inclusion
and digital inclusion’s impact on inclusive growth across diverse economies. The current study
addresses a gap in the literature by investigating the intertwined influence of institutions and
digital financial inclusion on inclusive development in LMICs, emphasizing the pivotal role of
institutional quality in this nexus.
This study makesoriginal contributionsto the existing body of knowledgeby conducting
an empiricalinvestigation into the:
effect of digital financial inclusion on inclusive development in LMICs;
the central roleof institutional quality in explainingthe finance-inclusive development
nexus; and
JCEFTS
17,2/3
134
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