Financial Inclusion, Governance, and Institutions: Evidence from Developing Economies

This paper argues that strong economic governance and institution are important elements in improving financial inclusion especially for the poor segment of the society because markets, economic activity and transactions more generally, cannot function well in its absence. This paper utilizes the data of more than 100,000 individuals’ characteristics in the Global Findex database to examine how these different characteristics are associated with financial inclusion. This paper employs probit model to explain measures of financial inclusion and then augmented the model with governance and institutional variables using principal component analysis. The results suggest that neither the impacts of governance indicators nor the freedom indexes are conclusive, while economic freedom show mixed results on financial inclusion. Governance has positive influenced on people wanting to open an account and make saving in formal financial institutions, but negatively impacted on borrowing behaviour. There is also significant differences across countries in particular between Muslim countries and non-Muslim countries in explaining financial inclusion. The study suggests that removing corruption, increasing transparent legal framework, fair judicial proceedings and administration are essential for development and raising financial inclusiveness prospects.