Financial innovations and economic growth: Does financial inclusion play a mediating role?

Figures & data

Table 1. Variable description, units and sources

VARIABLES	PROXY	SYMBOL	A priori expectation
Dependent
Economic growth	GDP Per Capita growth(Gul et al., 2018; Qamruzzaman & Wei, 2018	GDPPC
Independent
Financial innovation	Domestic credit to the private sector as a percentage of GDP(Nazir et al., 2021; Qamruzzaman & Jianguo, 2017	DCPS	(+)
Mediator
Financial inclusion	Index of Financial Inclusion(Sarma, 2015; Sarma & Pais 2011	IFI	(+)
Controls
Gross capital formationGovernment consumption expenditure	Gross capital formation (annual % growth)Government consumption expenditure (annual % growth)	DCPSGCEXP	(+)(+) or (-)
Automated teller machine	Growth in Automated teller machine per 100,000 adults	GRATM	(+)
Bank Overhead Cost	Bank Overhead Costs to Total Assets (%)	BOC	(+)

Figure 1. Simple mediation model.

Table 2. Descriptive statistics

	Mean	Median	S.D	Max.	Min.
GDPPC	2.076	1.965	4.632	32.169	−18.491
DCPS	16.354	13.797	11.408	65.742	1.248
GCF	7.443	5.640	22.672	218.754	–65.827
GCEXP	8.105	4.814	34.109	565.534	-55.348
GRATM	0.192	0.111	0.480	4.851	–1.206
BOC	5.597	5.245	3.375	42.639	0.001

Source: Author (2022)

GDP = Gross Domestic Product Per Capita; DCPS = Domestic Credit to Private Sector; IFI = Index of Financial Inclusion; GCF = Gross Capital Formation; GCEXP = Government Consumption Expenditure; GRATM = Growth in Automatic Teller Machine; BOC = Bank Overhead Costs to Total Assets (%);

Table 3. Correlation matrix, pairwise correlation between the variables

	GDPPC	DCPS	IFI	GCF	GCEXP	GRATM	BOC
GDPPC	1.000
DCPS	–0.018	1.000
IFI	-0.087	–0.290	1.000
GCF	0.426	-0.048	0.015	1.000
GCEXP	0.181	–0.137	0.088	0.203	1.000
GRATM	0.151	-0.202	0.043	0.063	0.008	1.000
BOC	0.136	–0.261	0.076	–0.080	0.131	0.048	1.000

Source: Author (2022)

Table 4. Financial innovations on economic growth

Dependent Variable: Economic Growth (Gross Domestic Product Per Capita Growth)
	Coefficient	Standard Error	P-Value
Lag (GDPPC)	0.167	0.038	0.000***
Financial Innovation	0.045	0.015	0.003***
Gross Capital Formation	0.080	0.013	0.000***
Government Cons. Expenditure	0.073	0.015	0.000***
Cons	-0.235	0.405	0.562
AR(1)			0.001
AR(2)			0.814
Sargan OIR			0.421
Hansen OIR			0.566
DHT for instruments
(a) GMM Instruments for levels			0.495
H excluding group			0.948
Dif(null, H = exogenous)
(b) gmm (lagged values)			0.245
H excluding group			0.824
Dif(null, H = exogenous)
(c) IV (years, eq (diff))
H excluding group			0.520
Dif(null, H = exogenous)			0.512
Instruments			22
Countries			26
Observations			286
Wald Chi^2			0.000

** significant at 5%; *** significant at 1%.

Table 5. Financial inclusions and financial innovation

Dependent Variable: Financial Inclusion
	Coefficient	Standard Error	P-Value
Lag (Financial Inclusion)	0.8220	0.0390	0.0000***
Financial Innovation	0.0001	0.0000	0.0010***
ATM Growth	0.0086	0.0014	0.0000***
Bank Overhead Costs	0.0012	0.0002	0.0000***
Constant	0.1370	0.0333	0.0000***
AR(1)			0.089
AR(2)			0.303
Sargan OIR			0.426
Hansen OIR			0.408
DHT for instruments
(a) GMM Instruments for levels
H excluding group			0.402
Dif(null, H = exogenous)			0.311
(b) gmm (lagged values)
H excluding group			0.580
Dif(null, H = exogenous)			0.277
(c) IV (years, eq (diff))
H excluding group			0.619
Dif(null,H = exogenous)			0.269
Instruments			24
Countries			26
Observations			235
Wald Chi^2			0.000

** significant at 5%; *** significant at 1%.

Table 6. Financial inclusion and economic growth

Dependent Variable: Economic Growth (Gross Domestic Product Per Capita)
	Coefficient	Standard Error	P-Value
Lag (GDPPC)	0.128	0.041	0.002***
Financial Inclusion	13.217	3.908	0.001***
Gross Capital Formation	0.105	0.006	0.000***
Government Cons. Expenditure	0.033	0.009	0.015***
Constant	–10.336	3.167	0.001***
AR(1)			0.001
AR(2)			0.805
Sargan OIR			0.073
HansenOIR			0.327
DHT for instruments
(a) GMM Instruments for levels			0.271
H excluding group			0.846
Dif(null,H = exogenous)
(b) gmm (lagged values)
H excluding group			0.221
Dif(null, H = exogenous)			0.493
(c) IV (years, eq (diff))
H excluding group			0.175
Dif(null, H = exogenous)			0.519
Instruments			23
Countries			26
Observations			301
WaldChi^2			0.000

** significant at 5%; *** significant at 1%.

Table 7. The mediating role of financial inclusion in the financial innovation-economic growth nexus

Dependent Variable: Economic Growth (Gross Domestic Product Per Capita)
	Coefficient	StandardError	P-Value
Lag (GDPPC)	0.178	0.045	0.000***
Financial Innovation	0.049	0.030	0.109
Financial Inclusion	–0.376	13.164	0.977
Gross Capital Formation	0.082	0.014	0.000***
Government Cons. Expenditure	0.075	0.017	0.000***
Constant	−0.045	11.525	0.997
AR(1)			0.001
AR(2)			0.806
Sargan OIR			0.372
Hansen OIR			0.494
DHT for instruments
(a) GMM Instruments for levels			0.455
H excluding group			0.490
Dif(null, H = exogenous)
(b) gmm (lagged values)			0.170
H excluding group			0.828
Dif(null,H = exogenous)
(c) IV (years, eq (diff))
H excluding group			0.628
Dif(null, H = exogenous)			0.381
Instruments			22
Countries			26
Observations			285
Wald Chi^2			0.000

** significant at 5%; *** significant at 1%.

Table 8a. Structural equation model

	Coefficient	OIM Std. Err	P-Value
StructuralEconomic GrowthFinancial InclusionFinancial InnovationConstant
	−24.152	7.852	0.002
	−0.014	0.022	0.528
	22.604	6.710	0.001
Financial InclusionFinancial InnovationConstant
	−0.0007	0.0001	0.0000
	0.8529	0.0029	0.0000
Var (e. Economic Growth)	19.7731	1.5121
Var (e. Financial Inclusion)	0.0009	0.0000

Table 8b. Mediation analysis of structural equation model

Estimates	Delta	Sobel	Monte Carlo*
Indirect Effect	0.045	0.045	0.045
Standard Error	0.017	0.017	0.016
Z. Value	2.666	2.690	2.774
P. Value	0.008	0.007	0.006
Confidence Interval	0.012, 0.078	0.012, 0.077	0.017, 0.081

Adjusted Baron and Kenny approach to testing mediation

STEP 1—IFI: DCPS (X -> M) with B = −0.263 and p = 0.000

STEP 2—GDPPC: IFI (M -> Y) with B = −0.170 and p = 0.002

STEP 3—GDPPC: DCPS (X -> Y) with B = −0.035 and p = 0.528

As step 1, step 2 and the Sobel’s test above are significant and step 3 is not significant the mediation is complete

Zhao, Lynch & Chen’s approach to testing mediation

STEP 1—GDPPC: DCPS (X -> Y) with B = −0.035 and p = 0.528

As the Monte Carlo test above is significant and step 1 is not significant you have indirect-only mediation (full mediation).

Table 9. The mediating role of financial inclusion in the financial innovation-economic growth nexus using bank concentration as a measure of financial innovation

Dependent Variable: Economic Growth (Gross Domestic Product Per Capita)
	Coefficient	StandardError	P-Value
Lag (GDPPC)	0.054	0.064	0.401
Financial InnovationFinancial Inclusion	−0.00131.566	0.0124.421	0.9050.000***
Gross Capital Formation	0.101	0.007	0.000***
Government Cons. Expenditure	0.016	0.014	0.274
Constant	−25.488	3.623	0.000***
AR(1)			0.003
AR(2)			0.388
Sargan OIR			0.371
Hansen OIR			0.355
DHT for instruments
(a) GMM Instruments for levels			0.323
H excluding group			0.473
Dif(null, H = exogenous)
(b) gmm (lagged values)			0.284
H excluding group			0.437
Dif(null,H = exogenous)
(c) IV (years, eq (diff))
H excluding group			0.278
Dif(null, H = exogenous)			0.443
Instruments			25
Countries			25
Observations			232
Wald Chi^2			0.000

** significant at 5%; *** significant at 1%.

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