Financial Inclusion and Financial Development Across Nations Throughout the Economic Cycle

ABSTRACT This study examines the nexus between financial inclusion and financial development within procyclical financial systems of lower and upper‐middle‐income countries from 2002 to 2021. Financial development is measured as the growth in credit to the private sector as a percentage of GDP, while financial inclusion encompasses both outstanding deposits with commercial banks as a percentage of GDP and ATM availability. The empirical analysis yields significant findings. Quantile regression results demonstrate heterogeneity in financial inclusion and financial development across the sample countries. Specifically, in lower‐middle‐income economies, the cyclical component of ATM availability (ATMC) demonstrates no statistically significant effect on financial development across most quantiles, with exceptions at the 25th and 75th percentiles. Conversely, ATMC exhibits substantial influence on financial development dynamics in upper‐middle‐income countries. Additionally, the usage dimension of financial inclusion (BCr_GDPproc: commercial bank deposits as a percentage of GDP) demonstrates a statistically significant positive association with financial development in lower‐middle‐income countries. These findings illuminate financial disparities in procyclicality contexts across countries stratified by income levels and underscore the efficacy of panel quantile regression in capturing the complex and heterogeneous nuances of financial development dynamics. The results suggest that macroeconomic financial factors, particularly within the framework of economic cyclicality, are determinants of financial inclusion. This research presents two key practical implications: from a banking sector perspective, it advocates for the expedited adoption of technological innovations in developing economies to enhance customers' financial management capabilities; from a regulatory perspective, it recommends the enhancement of financial literacy initiatives and institutional support for banks undergoing technological transitions to improve service delivery.