The Impact of Financial Inclusion on Economic Growth and Income Inequality

Financial inclusion is defined as the access of households and firms to beneficial and reasonably priced financial products and services which are in line with their necessities. These could be financial transactions, transfers, savings, and loans. After narrowing down the definition, it then measures financial inclusion by using indexation technique. A major contribution of this study is the development of a measure of financial inclusion via formation of three indices, namely financial access index, firm-level and household-level financial usage indices. These three indices capture different aspects of financial inclusion, which is comprised of access to financial services by both households and firms in addition to effective use of these services. Based on Global Findex database and the Enterprise Survey database collected by the World Bank, Financial Access database collected by the International Monetary Fund the study introduces measures of household-level and firm-level inclusion, with placing Europe and Central Asia in a historical and cross-country perspective. By using Panel and Ordinary Least Squares regression analysis, it analyzes the impact of financial inclusion on two important macroeconomic variables, namely growth and inequality. Moreover, it focuses particularly on the ECA region and analyzes the dynamics in the region. The study aims at documenting the status of financial inclusion in ECA, while shedding light on the impact of financial inclusion on growth and inequality. It concludes that, in line with the contemporary literature, financial inclusion enhances growth and reduces inequality with better access to resources to finance both consumption and investment. According to the article’s findings, the positive impact of financial inclusion on growth is significant in the ECA region. Keywords: Financial Inclusion, Economic Growth, Inequality, the World Bank, Europe and Central Asia, IMF