The impact of institutional quality and governance on financial inclusion in Africa: A two-step system generalised method of moments approach

Abstract

Orientation: Literature emphasises that institutional quality and governance are important elements in enhancing financial inclusion. Studies on institutions, governance and financial inclusion in developing economies found that governance and institutions have positively influenced people wanting to make savings and open a formal bank account.

Research purpose: This study investigated the impact of institutional quality and governance on financial inclusion in Africa.

Motivation of the study: The significance of how governance and institutions affect access to finance has largely been overlooked in previous research. Thus the principal objective of this study is to address this research gap.

Research approach/design and method: A system generalised method of moments technique for a panel data of 49 countries for the period 2004–2016 was employed.

Main findings: The results obtained suggest a positive impact of institutional quality and governance on financial inclusion within the region. Our study also found a significant positive effect of the lagged value of financial inclusion and banking sector size on financial inclusion for African countries. However, rural to total population and natural resources negatively influenced financial inclusion in Africa.

Practical/managerial implications: This study provides implications for policymakers which are fruitful if implemented. Policymakers should facilitate the existence of a transparent legal framework, removal of corruption and enhancing fair administration and judicial proceedings so as to enhance the prospects of financial inclusion. In addition, improving economic freedom and governance levels minifies the informality levels in the financial markets.

Contribution/value-add: This study adds value and knowledge to the current body on financial inclusion and governance issues in Africa, which has not received much attention in developing economies.