Role of Institutional Quality in Promoting Financial Inclusion

Despite evidence on the importance of financial inclusion, little is known about the role institutions play in fostering inclusion across countries. Using panel data corresponding to 125 countries for the period 2004-2015, this study sought to understand the country institutional characteristics associated with the ownership of deposit accounts. A standard regression model is estimated using fixed effects panel data techniques along a financial inclusion proxy and three measures of institutional quality. We provide the first empirical justification for the hypothesis that financial inclusion is non-negligibly driven by the institutional context. Specifically, rule of law is crucial in enhancing financial inclusiveness, more so in sub-Sahara Africa (SSA) where it has a stronger positive effect relative to other regions. In view of the fact that formal finance can be used as a means of boosting economic growth and combating social exclusion, increasing transparency of the legal framework, having fair judicial proceedings and good administration are essential ingredients for raising financial inclusiveness. The evidence presented in this paper may therefore help with the sequencing of institutional reforms that could promote financial inclusion.