Research: The Nexus between Financial Inclusion, Economic Growth and Income — Evidence from Nigeria

Supply-side hypothesis: relationship between financial inclusion, economic growth and income
  1. The direction of relationships between formal financial inclusion, economic growth and real income is unidirectional i.e. increased formal financial inclusion leads to real economic growth and then increase in real income.
  2. On the other hand, informal financial inclusion has a unidirectional causal relationship with formal financial inclusion i.e. INFI leads to FFI; while the direction of causality between informal financial inclusion and economic growth is bidirectional i.e. changes in informal financial inclusion cause changes in GDP, and changes in GDP also leads to changes in informal financial inclusion.
  3. We also discovered that, changes in formal financial inclusion cause changes in economic growth and income but not the other way around. That is, the more we are able to onboard excluded people into the formal financial services ecosystem, the more the needle shifts positively on the economic growth and income scale. Nevertheless, increases in economic growth and income have little, if any, effect on the rate of inclusion into the formal financial sector.
  4. There is causality between formal financial inclusion and economic growth. The theoretical assumptions of this study lie in explaining the supply- and demand-side arguments that being financially included spurs growth in economic activities and income. The result of our empirical analyses confirms this theory. The result also suggests that informal financial inclusion plays a vital role in the expansion of formal financial inclusion since informal sector activities contribute significantly to gross output.
  5. Improvements in real economic activities come from increased financial inclusion. There is sufficient evidence to say that, irrespective of the use of formal or informal providers of financial services, greater access to and use of these services enables even more economic participation thereby raising economic growth and ‘real’ income.
  6. However, the absence of a causal relationship between ‘real’ income and formal financial inclusion remains puzzling and requires further investigation. This gap stems from the hypothesis that as formal financial inclusion elevates real economic activities, ‘real’ income should rise. This phenomenon ought to be the case with the generation of higher income from economic activities; it should serve to improve access to and use of formal financial services and products.
  7. Finally, rising real economic activities leads to increased informal financial inclusion but not formal financial inclusion. This also requires further investigation.

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