Financial inclusion and economic growth: What roles do institutions and financial regulation play?

Abstract The extant literature indicates that financial inclusion has a direct influence on economic growth. This has been examined by previous studies by analysing the link between financial inclusion and economic growth. This study uses the two‐step system GMM approach to investigate the moderating role of financial regulation and quality of institutions on the linkage between economic growth and financial inclusion in Africa, using balanced panel data of 52 African countries spanning 2002–2019. The findings reveal a number of things; (i) financial inclusion, financial regulation, and all proxies of institutional quality exert strong and significant effects on economic growth; (ii) institutional quality enhances the impact of financial inclusion on economic growth; iii. Financial regulation dampens the effect of financial inclusion on economic growth. Based on these findings, we recommend the following; (i) central, local governments, and policymakers should formulate public policy that promotes inclusive finance. Such policies should aim at removing barriers and constraints such as excessive customer identification requirements that hinder people from gaining access to finance; (ii) central governments and policymakers in Africa should refine policy that promotes the involvement of the citizenry in governance processes, promote accountability of public institutions, ensure effective governance systems, controls corruption, promote rule of law, and political stability and ensure quality legal and regulatory regimes; (iii) African central governments should fine‐tune policy aimed at strengthening institutions and the regulatory framework. By implication, strong, independent, and quality institutions coupled with sound financial regulatory framework is required to spur the growth of African countries.