Finance Research Letters xxx (xxxx) xxx

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Financial inclusion, economic growth and the role of

digital technology
Siti Nurazira Mohd Daud *, Abd Halim Ahmad
School of Economics, Finance and Banking, Universiti Utara Malaysia, 06010 Sintok, Kedah Darul Aman, Malaysia

A R T I C L E I N F O A B S T R A C T

JEL codes: This paper examines the relationship between financial inclusion, digital technology and eco­
C33 nomic growth. A dynamic panel data analysis examines 84 countries since the GFC period. The
C54 results show that there is a positive and significant effect of financial inclusion and digital
O11
technology on country economic growth. In addition, digital technology plays a role in com­
O47
plementing the effects of financial inclusion on economic growth, implying that consolidation
Keywords:
efforts should take place in improving financial ecosystems via digital technology infrastructure.
Financial inclusion
Digital finance
Growth
Stability
Threshold

1. Introduction

Financial inclusion, which measures the degree of access to financial services and products, and poverty eradication, are critical for
finance-led growth strategies for many developing economies.1 This extensive literature supports the view that financial inclusion,
facilitates the distribution of capital and risk across different income and social groups (e.g. Levine, 2005; Claessens and Perotti, 2007;
Neaime and Gaysset, 2018; and Allen et al., 2020). More specifically, the broad social and economic benefits of providing better access
to financial services include increased household consumption, higher levels of domestic savings, increases in production output, more
equitable income distribution, and general improvements in the quality of life.2
However, currently, it is estimate that worldwide some 1.7 billion adults, mostly from the poorest communities, are unbanked and
excluded from the financial system (Demirguc-Kunt et al., 2017). To achieve both economic growth and poverty alleviation targets, as
well as other social objectives, policymakers worldwide must find solutions that enhance financial inclusion and central to this strategy
is the identification of factors that may impede or facilitate linkages and impediments in this complex process. These factors include
both physical infrastructure impediments, such as bank branch supply (e.g. Célerier and Matray, 2019), as well as social and cultural
factors (e.g. Miller et al., 2015) that prevent access to groups based on literacy (e.g. Lusardi and Mitchell, 2014; Carpena et al., 2019)

* Corresponding author.
E-mail address: sitinurazira@uum.edu.my (S.N.M. Daud).
1
This literature includes early academic studies by Levine, 1997; Schumpeter, 1912; De Gregorio and Guidotti, 1995; and Yunus, 1999, as well as
more recent studies by international organisations, such as IMF (2019) and policy discussions on the importance of financial inclusion (World Bank,
2018, 2020).
2
There is an extensive literature, but see for example Prina, 2015; Lee et al. 2021; Wiswall and Zafar; 2021.

https://doi.org/10.1016/j.frl.2022.103602
Received 28 June 2022; Received in revised form 15 December 2022; Accepted 17 December 2022
Available online 19 December 2022
1544-6123/© 2022 Elsevier Inc. All rights reserved.

Please cite this article as: Siti Nurazira Mohd Daud, Abd Halim Ahmad, Finance Research Letters,
https://doi.org/10.1016/j.frl.2022.103602
S.N.M. Daud and A.H. Ahmad Finance Research Letters xxx (xxxx) xxx

race, sexuality and gender (e.g. Shahriar, 2016; 2018; and Shariar and Shepherd, 2019 and Shariar et al. 2020) and aversion to risk as,
in Holt and Laury (2002), due to limited savings (Carvalho et al., 2016).
This paper investigates the role that one key infrastructure impediment: digital technology plays in effecting financial inclusion. We
build upon recent experimental work that highlights the role that technology can play in overcoming infrastructure impediments to
financial inclusion. For example, Lee et al. (2021) highlight the importance of mobile banking in rural communities. We propose that
despite well-known country-level heterogeneity (including differences in regulation, infrastructure, culture, and financial literacy),
digital technology has an important role in enhancing financial inclusion. We investigate the link between digital technology and
financial inclusion in a macroeconomic context based on innovation diffusion theory. The focus is on the enabling relationships, such
as the presence of a financial market ecosystem that facilitates these processes. Furthermore, given the use of international data, we
also are able to identify the tipping point digital technology plays in enhancing financial inclusion.
Recent technological advancements associated with mobile telephones and internet access have facilitated improvements in the
cost and delivery of banking and finance services, especially at the retail and consumer level (Ernst and Young, 2017).3 Consequently,
customized products and tailored financial products have been made available at low cost and in convenient ways.
These financial products and services impact the economy through the connectivity of financial services and products, the
affordability and convenience of services, and growth in banking sector and banking performance. Leveraging technology advance­
ments in the financial sector would boost economic activities via the earnings from financial returns and consumption-smoothing
activities at affordable costs for poor people, women, farmers, the elderly, and underserved customers. According to a recent study
by Tok and Heng (2022), embracing financial technology, also known as Fintech, played a positive role in narrowing the digital access
gap between rural, rich, and poor groups, except for the gender gap. However, the issue of sociocultural factors and social norms in
complementing the technological enhancement of financial services products remains a challenge (Tok and Heng, 2022; Khera et al.,
2022), although Khera et al. (2022) discovered that greater gender diversity is associated with better performance of fintech firms. In
particular, when comparing those with a high digital inclusion index to those with a low-to-medium traditional inclusion index, digital
services would supplement traditional services for those with relatively higher per capita income, while digital services would sub­
stitute traditional services for those with relatively lower per capita income (Khera et al., 2021). Moving forward, various pilot steps
have been taken by central banks on the Central Bank Digital Currencies (CBDCs) project in exploring the design, implementation, and
implications of CBDC in encouraging potential new services, improving efficiency and bridging the wealth gap rich-poor groups
despite its reputational risk and cybersecurity risk (Sarmiento, 2022; Soderberg et al., 2022)
However, challenges remain with advanced economies outpacing the digital transformation of financial services in emerging
markets (International Financial Corporation Annual Report, 2017).4 The issue arises in the link between digital technology and
financial inclusion.
The diffusion theory of innovation explains the innovation of financial services products through the advancement of technology at
lower economic and social costs and is relevant in the current environment setting. Furthermore, time matters in the context of
acceptance to adapt innovations by individual. Literature on the effect of financial inclusion on growth are converged towards finding
positive effects on country economic growth (Ghosh, 2011; Sharma, 2016; Lenka and Sharma, 2017; Sethi and Acharya, 2018, Kim
et al., 2018).
Although quite a substantial number of empirical studies have been conducted on the effect of financial inclusion on growth, far too
little attention has been paid to investigating the role of digital technology in the effect of financial inclusion on growth. Thus, the
paper is also able to make an important contribution to the empirical finance-growth literature by investigating the effect of financial
inclusion on growth, subject to the digital technology. These findings can initiate specific policy strategies in a targeted group in a
country to enhance the financial inclusion growth nexus.
The paper is structured as follows. Section II reviews the data and methodology, the empirical results are presented in section III,
and section IV concludes the paper.

2. Model specification and data

This paper follows the standard growth literature to investigate the finance inclusion-led growth. The basic model used to estimate
the impact of financial inclusion and digital technology on the growth relationship is as follows:

GROWTHi,t = β0 + β1 INITIAL INCOMEi, t− 1 + β3 FIi,t + β4 DIGITALi,t + β5 INVESTMENTi,t + β6 POPULATIONi,t + β7 TRADEi,t + γ i

+ εi,t
(1)

where GROWTH is the economic growth rate, FI is the country’s level of financial inclusion, DIGITAL is the digital technology
infrastructure, INITIAL INCOME is the gross domestic product (GDP) from the previous period, INVESTMENT is ratio investment to

3
Based on 20 markets and over 22,000 online interviews, they found on average one in three digitally active consumers use two or more Fintech
products, which is a significant increase from 2015 where they found one in seven digitally active users.
4
Besides the trust issue, low penetration of formal financial services, low income and financial literacy level, underdeveloped technology
ecosystem, and weak infrastructure are among the factors that contributed to the difference (International Financial Corporation Annual Report,
2017).

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S.N.M. Daud and A.H. Ahmad Finance Research Letters xxx (xxxx) xxx

GDP, POPULATION is population growth, and TRADE is ratio of total trade to GDP of a country. INITIAL INCOME, INVESTMENT,
POPULATION, and TRADE are other control variables guided by past growth literature to represent physical and human capital
accumulation or as factor inputs in production. εit is an error term, i = 1, ..N represents the country, and t = 1, ..T represents the time
index.
The system-generalized method of moments (GMM) estimator proposed by Holtz-Eakin et al. (1988) is employed. The advantage of
this method is that it uses the instrumented variable to overcome the endogeneity problem of all explanatory variables. If the moment
conditions are valid, as Blundell and Bond (1998) showed in their Monte Carlo simulations, then the system GMM estimators perform
better than the first difference GMM estimator. We can test the validity of the moment conditions by using the conventional test of
over-identifying restrictions, proposed by Sargan (1958), thereby testing the null hypothesis to determine if the error term is not
second-order serially correlated.
We proceed with the dynamic panel threshold regression method by Kremer et al. (2013) to explore the non-linear relationship of
financial inclusion and digital technology in relation to economic growth. In addition, this method was employed to test for the ex­
istence of threshold estimates of financial inclusion and infrastructure on a country’s economic growth. The threshold regression
model is as follows:
GROWTHit = μi + β1 FIit I(FIit ≤ λ) + δ1 I(FIit ≤ λ) + β2 FIit I(FIit > λ) + γXit + θt + εit (2)

where FI is the threshold variable and λ is the unknown threshold parameter. In the following model, DIGITAL is the threshold variable:
GROWTHit = μi + β1 FIit I(DIGITALit ≤ λ) + δ1 I(DIGITALit ≤ λ) + β2 FIit I(DIGITALit > λ) + γXit + θt + εit (3)
I() is the indicator function, which takes the value 1 if the argument in parentheses is valid and 0 otherwise. This allows the role of
financial inclusion on a country’s economic growth to differ depending on whether financial inclusion or digital technology is below or
above some unknown level of λ. The impact of finance growth is captured by β1 and β2 for low and high regimes, respectively. This
method allows for a difference in regime intercept (δ1).
Our paper employs the balance panel data from 2011 to 2017 of 84 countries. The financial inclusion indicator is measured as
deposit accounts with commercial banks per 1000 adults (in natural log), and the digital technology represents the number of secure
internet servers obtained from the International Monetary Fund (IMF) Financial Access Survey.5 In addition, the country economic
growth, GDP, investment rate, population growth, and total trade are from the World Development Indicator (WDI).
Table 1 presents the descriptive statistics and the measurements of the variables that are used in this study. The mean growth rate of
GDP per capita was at 2.26 percent and standard deviation at 2.83, with a maximum double-digit growth of 13.04 percent. Focusing on
the financial inclusion indicator, the mean is 6.84 with a small variation of 0.97, while the digital technology indicator shows a mean of
6.702 with a 2.83 standard deviation.

3. Results and discussion

The estimation results of overall sample (include high-income countries and non-high-income countries) are shown in Table 2.
Based on the baseline model, the financial inclusion variable shows an insignificant effect on economic growth. However, by
considering the quadratic function of deposit on country growth, the financial inclusion and financial inclusion square are only sig­
nificant at the 10 percent significance level. Even though this might suggest the possible existence of a tipping-point of financial in­
clusion variables on country growth, the evidence is rather weak. In addition, according to Law and Singh (2014), the square term
would have some discrepancy in interpreting the effect on economic growth. Thus, this would serve as a preliminary test of a
non-linear relationship between financial inclusion and economic growth before an analysis on the threshold model is conducted.
Meanwhile, results on the effect of digital technology on country economic growth shows an insignificant effect of digital technology
on growth. However, by incorporating a square term of the digital technology variable, there is a significant effect of the linear and
square terms of digital technology on country economic growth at the 1 percent significance level with a negative and positive sign,
respectively.6
Other control variables, show the correct signs and are significant at least at the 5 percent significance level.
The empirical results on the role digital technology plays in affecting the effect of financial inclusion on country economic growth
are shown in column 7 of Table 2. The statistical significance of the interaction term of financial inclusion and digital technology
indicates that the changes in GDP per capita growth are the result of changes on financial inclusion being contingent on digital
technology. The positive sign of the marginal effect of financial inclusion implies that as digital technology improves, the financial­
ization improves economic growth. These marginal effects are statistically significant at the 1 percent significance level. This implies
that digital technology plays a role in the effect of financial inclusion on economic growth.7
In addition, for the depth of the analysis, the sample was segregated by level of income, where the estimates of non-high-income

5
Both variables are the closest proxy available in time series frequency.
6
We also estimate a 3-year average which shows insignificant effect of financial inclusion. While there is role played by digital technology on
country’s economic growth. The results are available upon request.
7
To provide a robustness test, the interest variable with 1-year lagged is also estimated. Consistent with the earlier findings, there is an insig­
nificant effect of financial inclusion on country economic growth. While digital technology shows a positive effect on economic growth. The results
is available upon request.

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S.N.M. Daud and A.H. Ahmad Finance Research Letters xxx (xxxx) xxx

Table 1
Descriptive statistics from 2011 to 2017.
Variables Mean Std. Median Min. Max. Measurement
deviation

Growth rate of GDP per 2.26 2.83 2.24 -9.44 13.04 Annual percentage growth rate
capital
Initial income 24.83 2.04 24.44 19.02 29.43 Lagged of gross domestic product per capita in constant 2010 U.S. dollars
(in natural log)
Investment 25.16 8.27 23.57 11.37 67.91 Gross capital formation as percentage of GDP
Population growth 1.29 1.29 1.22 -0.82 7.06 Annual growth (in percent)
Trade 90.35 41.41 83.38 0.20 325.86 Total exports plus imports as percentage of GDP
Financial inclusion 6.84 0.97 7.02 3.99 8.89 Deposit accounts with commercial banks per 1000 adults (in natural log)
Digital technology 6.702 2.83 6.51 0 14.00 Secure internet servers (in natural log)

Table 2
Results on GMM-system estimation on the role of financial inclusion on country economic growth for the complete sample.
Growth rate of GDP per capita Financial inclusion on country Digital technology on country Financial inclusion and digital
economic growth economic growth technology on country economic
growth
Model 1(a) Model 1(b) Model 1(c) Model 1(d) Model 1(e) Model 1(f)

Initial income -2.48(1.01)*** -2.789(1.01)*** -2.55(1.02)*** -1.58(1.01) -2.82(1.04)*** -3.30(1.30)***

Investment 0.140(0.02)*** 0.14(0.02)*** 0.14(0.02)*** 0.15(0.02)*** 0.14(0.02)*** 0.14(0.02)***
Population growth -1.48(0.34)*** -1.50(0.34)*** -1.46(0.29)*** -1.55(0.30)*** -1.50(0.32)*** -1.56(0.35)***
Trade 0.03(0.01)*** 0.03(0.01)*** 0.03(0.01)*** 0.04(0.01)*** 0.03(0.01)*** 0.03(0.01)***
Financial inclusion 0.02(0.48) -5.61(3.05)* -0.08(0.47) -1.25(0.78)
Financial inclusion ^2 0.45(0.25)*
Digital technology 0.06(0.06) -0.66(0.33)*** 0.09(0.06) -2.17(0.86)***
Digital technology ^2 0.04(0.02)***
Financial inclusion x digital technology 0.32(0.12)***
Constant 59.13(23.88)*** 84.22(23.98)*** 60.12(24.84) 38.43(24.44) 67.43(24.88)*** 87.24(31.00)

AR(2) test (p-value) 0.22 0.22 0.23 0.21 0.22 0.21

Sargan test (p-value) 0.16 0.15 0.18 0.11 0.20 0.24

Notes: ***, ** and * denotes significant at 1 percent, 5 percent, and 10 percent, respectively. The number in brackets denotes the standard error. This
table shows regression results on the effect of financial inclusion on country economic growth for the period 2011 to 2017 for 84 countries.

countries are revealed in Table 3. The results show that financial inclusion positively and significantly impacts economic growth for
non-high-income countries. Meanwhile, digital technology shows a positive effect (at the 5% level of significance) on economic growth
at the quadratic term of the digital technology variable. This implies that the development of financial inclusion and digital technology
are associated with increased country growth. In addition, this indicates that the effect of financial inclusion and digital technology
vary depending on the level of income of a country. This is in line with the argument by Demirguc-Kunt and Klapper (2013) that
different income levels can lead to disproportionate benefits of financial inclusion across the population. Meanwhile, the interaction
term of financial inclusion and digital technology shows a positive effect indicating that digital technology plays some role in com­
plementing the effects of financial inclusion on economic growth. All estimated results do not reject the null of a no second-order serial
correlation and no over-identifying restrictions for the estimation. This shows that the system GMM estimator does not indicate a
serious problem with the validity of these instrument variables
The results on the possible threshold level of financial inclusion and the digital technology level a country should achieve are
reported in Table 4. Consistent with the earlier results in for overall sample of countries, there is a threshold level for financial inclusion
that needs to be achieved before it positively affects country growth. The point of estimates of the threshold value is 7.56 with a 95
percent confidence interval [7.563, 7.564]. The mean and median of the financial inclusion variable are 6.84 and 7.02, respectively,
which is lower than the estimated threshold level (7.56). This highlights the importance of achieving the threshold level before it can
benefit the country’s economic growth. The pattern is also similar in the context of digital technology, where the mean and medial
values are lower than the estimated threshold level.
On the other hand, the threshold level estimates for financial inclusion in non-high-income countries indicates a threshold level of
5.16. The effect of financial inclusion below and above the threshold level is positive with a significant effect at the 1 percent sig­
nificance level below the threshold level. This would indicate that, in the context of non-high-income countries, that country is
experiencing the positive effect of financial inclusion on economic growth.

4. Conclusion

Using data from 84 countries covering the period 2011 to 2017, this study shows that there is a dynamic relationship between
digital technology on country economic growth. In addition, we also found that digital technology plays a role in the effect of financial

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S.N.M. Daud and A.H. Ahmad Finance Research Letters xxx (xxxx) xxx

Table 3
Results of GMM-system estimation on the role of financial inclusion on country economic growth for non-high-income countries.
Growth rate of GDP per capita Financial inclusion on country Digital infrastructure on country Financial inclusion and digital
economic growth economic growth infrastructure on country economic
growth
Model 2(a) Model 2(b) Model 2(c) Model 2(d) Model 2(e) Model 2(f)

Initial Income -8.65*** (2.23) -9.15*** -8.62*** (2.95) -9.04*** (2.89) -10.85*** (3.52) -9.66***
(2.26) (3.31)
Investment 0.16*** (0.02) 0.17*** (0.02) 0.15*** (0.02) 0.16*** (0.22) 0.16*** (0.02) 0.17*** (0.02)
Population Growth -1.48*** (0.14) -1.48*** -1.40*** (0.25) -1.38*** (0.25) -1.42*** (0.14) -1.45***
(0.15) (0.16)
Trade 0.00(0.01) 0.00(0.01) 0.00(0.01) -0.01(0.02) -0.01(0.01) -0.01(0.02)
Financial Inclusion 1.88*** (0.47) 4.96(3.89) 1.97*** (0.47) 1.14* (0.63)
Financial Inclusion ^2 -0.24(0.31)
Digital Technology 0.17*(0.09) -0.37(0.25) 0.09(0.11) -1.15*(0.63)
Digital Technology ^2 0.04*** (0.02)
Financial Inclusion x Digital 0.19*** (0.09)
Technology
Constant 199.80*** 202.03(58.20) 210.32*** 222.73*** 253.49*** 230.04(80.29)
(53.01) (71.59) (70.43) (85.15)
AR(2) test (p-value) 0.21 0.21 0.21 0.21 0.23 0.22
Sargan test (p-value) 0.19 0.17 0.24 0.27 0.22 0.24

Notes: ***, ** and * denotes significant at 1 percent, 5 percent, and 10 percent, respectively. Number in brackets denotes the standard error. The
classification is based on World Bank Country Classification, July 2018. The World Bank classifies high income country as GNI per capita of US
$12,055 as of July 2018. The number of countries in the sample is 59.

Table 4
Robustness test on the non-linear relationship.
Growth rate of GDP per capita Overall (n = 84) Non-high-income countries (n = 59)

Threshold variable Deposit Secure internet server Deposit Secure internet server
Threshold estimates,̂λ 7.56 6.88 5.16 6.88
95% confidence interval [7.563, 7.564] [3.850, 9.409] [4.798, 5.173] [3.850, 7.882]
Impact of Financial Inclusion(̂
β1 ) -0.78(0.71) 3.44(1.43)***
Impact of Financial Inclusion ̂
β2 5.78(2.46)*** 0.09(0.86)
Impact of Digital Technology (̂
β1 ) -0.53(0.44) -0.58(0.44)
Impact of Digital Technology ̂
β2 0.17(0.27) 0.18(0.28)
Impact of covariates
Initial income it-1 -1.79(2.05) 2.85(6.45) -3.79(2.41) 2.77(5.78)
Investment it 0.07(0.03)*** 0.08(0.04)*** 0.08(0.03)*** 0.08(0.04)***
Population growth it -0.65(0.23)*** -0.66(0.27)*** -1.32(0.22)*** -1.28(0.22)***
Trade it 0.03(0.01)*** 0.03(0.02)*** 0.04(0.02)*** 0.03(0.02)
̂
δ1 53.36(19.59)*** 6.19(1.83)*** 14.65(6.50)*** 6.38(2.04)***

Notes: ***, ** and * denotes significant at 1 percent, 5 percent and 10 percent respectively.

inclusion on economic growth. This suggests that developing the digital technology, including physical infrastructure, could enhance
the financial inclusion’s effect on growth. Therefore, leveraging technology to facilitate a higher level of financial inclusion should be
prioritized to drive a country’s financial inclusion policy. In this sense, governments’ incentives on digital finance initiatives may
empower moves that leverage the available technology for the people and speed up the inclusion. Future research areas can potentially
include the awareness and readiness of the consumer on the adoption of digital technology to see a clearer picture of the issues
surrounding financial inclusion. The digitalization of financial services products in helping people in rural areas can also be studied to
see the social and economic impact on the communities.

Author statement

All authors shared in the of this paper.

CRediT authorship contribution statement

Siti Nurazira Mohd Daud: Conceptualization, Formal analysis, Writing – review & editing. Abd Halim Ahmad: Conceptuali­
zation, Formal analysis, Writing – review & editing.

5
S.N.M. Daud and A.H. Ahmad Finance Research Letters xxx (xxxx) xxx

Data availability

Data will be made available on request.

Acknowledgements

This work was supported by the Universiti Utara Malaysia under the Geran Kolej Universiti Utara Malaysia [S/O Code: 14647].

Appendix 1. List of countries

Afghanistan, Algeria, Argentina, Armenia, Austria, Azerbaijan, Bahamas, Bangladesh, Belize, Bhutan, Bolivia, Bosnia and Herze­
govina, Brunei Darussalam, Bulgaria, Cambodia, Chile, Colombia, Comoros, Costa Rica, Croatia, Czech Republic, Ecuador, El Salvador,
Estonia, Fiji, Finland, Georgia, Ghana, Guatemala, Guinea, Guyana, Haiti, Honduras, Hungary, India, Indonesia, Italy, Jamaica, Japan,
Jordan, Kenya, Korea Republic, Latvia, Lebanon, Macedonia, Madagascar, Malaysia, Malta, Mauritania, Mauritius, Mexico, Moldova,
Montenegro, Morocco, Mozambique, Myanmar, Netherland, Nicaragua, Norway, Oman, Pakistan, Palau, Panama, Paraguay, Peru,
Philippines, Poland, Portugal, Rwanda, Saudi Arabia, South Africa, Spain, Sweden, Switzerland, Thailand. Turkey, Uganda, Ukraine,
United Arab Emirates, Uzbekistan, Vietnam, West Bank and Gaza, Zambia, Zimbabwe.

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