Impact of Inflation on Financial Inclusion: A Global and Regional Analysis

This study investigates the effect of inflation on the accessibility dimension of financial inclusion across 61 countries. The consumer price index and the GDP implicit price deflator are used as measures of inflation. Four accessibility indicators of financial inclusion are used which are the composite financial inclusion index, the number of bank depositors, ATM penetration and the number of bank branches. Using the median quantile regression and the two-stage least squares regression methods, the findings reveal that inflation has a positive effect on financial inclusion in European countriaes. A one percent increase in inflation leads to at least a 0.05 percent increase in financial inclusion in Europe. A negative but insignificant effect was found in African, Asian and the Americas countries. The moderation analysis shows that banking sector stability does not weaken the adverse effect of inflation on financial inclusion in African countries, but a high loan-to-deposit ratio in the banking sector weakens the adverse effect of inflation on financial inclusion and accelerates financial inclusion in a high inflation environment in African countries. In the individual mechanism analysis, we find that inflation decreases the number of bank depositors in the Americas and increases the number of bank depositors in European countries. High inflation decreases financial inclusion through a decrease in the number of bank branches in African and European countries. The implication of the findings is that inflation adversely affect financial inclusion, and the effect depend on the financial access indicator being examined. Policymakers need to identify the financial access indicators that are worst hit by rising inflation, and they should explore how monetary policy tools can reduce inflation persistence without decreasing the level of financial inclusion.