Financial Inclusion and Economic Growth: The Role of Governance in Selected MENA Countries

Financial inclusion, whether in terms of adoption or usage, is one of the main, but challenging priorities in the MENA region. The paper empirically investigates the relationship between financial inclusion and economic growth in selected MENA countries. A system GMM dynamic panel model technique is employed on yearly data for the period 1965-2016, using a number of measures of financial inclusion covering the households and the firms access to finance. Particularly, the study uses indicators such as the number of bank accounts (per 1000 adult population), bank accounts for corporates/enterprises, and the number of bank branches and ATMS (per 100,000 people), percentage of firms using banks to finance investments, the percentage of firms using bank loans to finance working capital, and the percentage of firms using banks to finance investments. The results of the study indicate that financial inclusion positively impacts GDP per capita growth in the selected countries. Financial inclusion measured by the household’s financial access index has a positive and statistically significant impact on economic growth in the MENA region, but requires supervisory and regulatory regimes with backing of the rule of law, judicial independence, contract enforcement, control of corruption, and political stability. The effect firms’ access to finance is only significant in the presence of strong institutions. The results were insignificant for the general financial inclusion measure.