Financial inclusion - economic growth nexus: traditional finance versus digital finance in Sub-Saharan Africa

Figures & data

Table 1. Variables, Description and Sources

Variable	Description	Type	Sources
GDPPC	Gross Domestic Product, at constant 2010 US$—a measure of economic growth	Dependent	World Bank (2020)
TFI	Traditional Financial Inclusion Index—a measure of the access and usage dimensions of bank-based of financial inclusion	Independent	Authors’ PCA
DFI	Digital Financial Inclusion Index—a measure of the access and usage dimensions of digital payment system linked to financial technology	Independent	Authors’ PCA
TADI	Traditional Access Dimension Index—a measure of reachability and wide penetration of traditional finance	Independent	Authors’ PCA
TUDI	Traditional Usage Dimension Index—a measure of the level of utilization of the traditional finance	Independent	Authors’ PCA
DADI	Digital Access Dimension Index—a measure of reachability and wide penetration of digital finance	Independent	Authors’ PCA
DUDI	Digital Usage Dimension Index—a measure of the level of utilization of the digital finance	Independent	Authors’ PCA
INV	Total investment as a share of GDP—a measure of the aggregate contribution of capital made in an economy over a year.	Control	World Bank (2020)
POP	Total population of ages 15–64—a measure of the level of labour force participation.	Control	World Bank (2020)
TROP	Trade Openness—the sum of the imports and exports expressed as a ratio of GDP, measuring the level of international trade	Control	World Bank (2020)
GEX	Government expenditure as a share of GDP—government expenditures for purchases of goods and services which measures government participation in the economy.	Control	World Bank (2020)
PSE	Primary school enrolment ratio—a measure of human capital	Control	World Bank (2020)
INF	Inflation rate—a measure of the annual change in the cost of specific basket of consumer goods and services	Control	World Bank (2020)

Note: PCA means principal component analysis

Figure 1. Various Indexes of Financial Inclusion and GDP per capita.

Table 2. Descriptive Statistics of Variables

Variable	Obs	Mean	Std. Dev.	Min	Max
GDPPC	261	3.205525	0.3936734	2.645612	4.201778
TFI	261	1.15E-09	1.272171	−4.385016	3.084587
DFI	261	−6.51E-09	1.343258	−3.682958	2.246802
TADI	261	5.36E-09	1.854058	−5.841026	4.748164
TUDI	261	−9.58E-09	1.354956	−5.867438	2.979672
DADI	261	7.66E-09	1.619029	−3.900151	2.673748
DUDI	261	−1.65E-08	1.29094	−4.400883	2.107788
INV	258	1.370758	0.1597989	0.8697421	1.899826
POP	261	6.809748	0.6192946	4.789433	8.044932
TROP	259	1.780785	0.3365039	−0.1053346	2.335424
GEX	255	1.170892	0.1974187	0.5547934	1.608029
PSE	206	2.012824	0.0751121	1.822269	2.168986
INF	257	9.490592	39.47317	−3.233389	557.2018

Note: All variables are in natural logarithm except inflation (INF).

Table 3. Baseline Result

	Traditional Financial Inclusion			Digital Financial Inclusion			Comprehensive Financial Inclusion
	FGLS (1)	FE-GLS (2)	GMM (3)	FGLS (4)	FE-GLS (5)	GMM (6)	FGLS (7)	FE-GLS (8)	GMM (9)
GDPPC-1			0.946*** (0.008)			0.986*** (0.007)			0.991*** (0.005)
TFI	0.035*** (0.006)	0.012*** (0.002)	0.010*** (0.002)
DFI				0.005** (0.002)	0.003*** (0.001)	0.002* (0.001)
IFI							0.016*** (0.003)	0.006*** (0.001)	0.007*** (0.001)
INV	−0.036 (0.031)	0.016 (0.011)	0.010 (0.010)	−0.020 (0.033)	0.038*** (0.011)	0.030*** (0.008)	0.010 (0.024)	0.028** (0.012)	0.021** (0.009)
POP	−0.297*** (0.030)	0.481*** (0.007)	−0.031*** (0.009)	−0.385*** (0.020)	0.471*** (0.011)	−0.021*** (0.003)	−0.290*** (0.030)	0.470*** (0.010)	−0.011** (0.004)
TROP	−0.018 (0.019)	0.004 (0.009)	−0.002 (0.003)	−0.023* (0.012)	−0.002 (0.010)	−0.008** (0.003)	−0.011* (0.007)	−0.001 (0.010)	0.002 (0.004)
GEX	−0.049* (0.029)	−0.011 (0.013)	−0.014* (0.007)	0.024 (0.032)	0.020 (0.014)	−0.018* (0.009)	−0.015 (0.020)	0.011 (0.014)	−0.021** (0.008)
PSE	−0.227* (0.117)	0.082*** (0.022)	−0.061 (0.036)	−0.053*** (0.137)	0.093*** (0.035)	−0.022 (0.026)	−0.168* (0.097)	0.108*** (0.032)	−0.113*** (0.034)
INF	−0.0010*** (0.0000)	−0.0001*** (0.0000)	−0.0001*** (0.0000)	−0.0001** (0.0000)	−0.0001*** (0.0000)	−0.00004*** (0.0000)	−0.0001*** (0.0000)	−0.0001*** (0.0000)	−0.0001*** (0.0000)
Constant	5.819*** (0.353)		2.035*** (0.584)	6.925*** (0.369)		2.783*** (0.654)	5.536*** (0.323)		3.811*** (0.582)
Mod. Wald	270.91***			362.13***	362.13***		384.92***	384.92***
Wooldridge	53.84***			48.41***	48.41***		49.538***	49.538***
VIF	1.4			1.31			1.35
D-W-H			15.25***			11.53***			4.29**
Wald Chi2 Test	149.66***	1.61e+07***		447.43***	1.45e+07***		139.31***	1.74e+07***
F test			109,538.79***			29,267.49***			40,136.97***
AR(1)			0.314			0.054			0.077
AR(2)			0.111			0.278			0.355
Hansen			0.224			0.226			0.142
Obs	201	201	173	201	201	173	201	201	173
Instruments			28			27			28
Countries	29	29	29	29	29	29	29	29	29

Notes: (1) FGLS, FE-GLS, and GMM refers to feasible generalised least squares, fixed effect feasible generalised least squares and two step system generalised method of moment respectively; (2) *, **, *** represents statistical significance at 10%, 5% and 1% level respectively. The value of the Variance Inflation Factor (VIF) is less than 10 signifying no multicollinearity in the models. The non-significant value of AR (2) and Hansen test for overidentification restriction show no second-order autocorrelation in the error terms and the validity of instruments respectively. Standard errors are in parentheses.

Table 4. The Access sub dimension (Traditional and Digital) and GDP per capita

	Access Dimension of Traditional Financial Inclusion			Access Dimension of Digital Financial Inclusion
	FGLS (10)	FE-GLS (11)	GMM (12)	FGLS (13)	FE-GLS (14)	GMM (15)
GDPPC-1			0.918*** (0.014)			1.019*** (0.011)
TADI	0.065*** (0.007)	0.010*** (0.002)	0.012*** (0.002)
DADI				0.005** (0.024)	0.002*** (0.001)	0.002*** (0.001)
INV	−0.052 (0.033)	0.026** (0.011)	−0.001 (0.012)	−0.025 (0.448)	0.032*** (0.011)	0.056*** (0.013)
POP	−0.259*** (0.020)	0.480*** (0.011)	−0.035*** (0.012)	−0.384*** (0.020)	0.478*** (0.011)	0.008 (0.009)
TROP	−0.025 (0.023)	0.005 (0.010)	−0.003 (0.004)	−0.023* (0.012)	−0.002 (0.010)	−0.010** (0.004)
GEX	−0.017 (0.036)	0.019 (0.014)	−0.008 (0.009)	0.021 (0.032)	0.019 (0.014)	−0.010 (0.014)
PSE	−0.282* (0.146)	0.061 (0.037)	−0.232*** (0.053)	−0.527*** (0.136)	0.072** (0.036)	0.227*** (0.049)
INF	−0.0010* (0.0001)	−0.0001*** (0.0000)	−0.0001*** (0.0000)	−0.0001** (0.0000)	−0.0001*** (0.0000)	−0.0001*** (0.0000)
Constant	5.669*** (0.373)		2.636*** (0.446)	6.912*** (0.373)		1.446 (0.889)
Mod. Wald	263.60***			362.56***
Wooldridge	55.04***			49.96***
VIF	1.47			1.31
D-W-H			30.42***			5.78***
Wald Chi2 Test	505.31***	1.29e+07***		559.17***	1.25e+07***
F test			32,160.08***			6071.67***
AR(1)			0.670			0.083
AR(2)			0.138			0.230
Hansen			0.507			0.284
Obs	201	201	173	201	201	173
Instruments			28			28
Countries	29	29	29	29	29	29

Notes: (1) FGLS, FE-GLS, and GMM refers to feasible generalised least squares, fixed effect feasible generalised least squares and two step system generalised method of moment respectively; (2) *, **, *** represents statistical significance at 10%, 5% and 1% level respectively. The value of the Variance Inflation Factor (VIF) is less than 10 signifying no multicollinearity in the models. The non-significant value of AR (2) and Hansen test for overidentification restriction show no second-order autocorrelation in the error terms and the validity of instruments respectively. Standard errors are in parentheses.

Table 5. The Usage sub dimension (Traditional and Digital) and GDP per capita

	Usage Dimension of Traditional Financial Inclusion			Usage Dimension of Digital Financial Inclusion
	FGLS (16)	FE-GLS (17)	GMM (18)	FGLS (19)	FE-GLS (20)	GMM (21)
GDPPC-1			0.958*** (0.015)			1.004*** (0.008)
TUDI	0.008** (0.004)	0.006** (0.002)	0.007*** (0.002)
DUDI				0.005 (0.004)	0.004*** (0.001)	0.009*** (0.002)
INV	0.008 (0.029)	0.015 (0.013)	0.017 (0.015)	−0.024 (0.036)	0.042*** (0.012)	0.058*** (0.009)
POP	−0.302*** (0.036)	0.489*** (0.011)	−0.029* (0.016)	−0.400*** (0.021)	0.466*** (0.011)	−0.018*** (0.006)
TROP	−0.012 (0.013)	−0.001 (0.011)	−0.002 (0.040)	−0.027 (0.017)	0.001 (0.010)	−0.019*** (0.004)
GEX	−0.029 (0.026)	0.001 (0.016)	−0.012 (0.010)	−0.023 (0.039)	0.023* (0.014)	−0.031*** (0.010)
PSE	−0.246* (0.126)	0.050 (0.036)	−0.003 (0.049)	−0.558*** (0.160)	0.104*** (0.035)	0.065* (0.032)
INF	−0.0001*** (0.0000)	−0.0001*** (0.0000)	−0.00004*** (0.0000)	−0.0001** (0.0000)	−0.0001*** (0.0000)	−0.00004*** (0.00000)
Constant	5.784*** (0.400)		2.066*** (0.672)	7.082*** (0.418)		5.097*** (0.828)
Mod. Wald	317.55***	362.13***		361.32***	362.13***
Wooldridge	54.27***	48.41***		51.34***	48.41***
VIF	1.34			1.34
D-W-H			11.29***			11.37***
Wald Chi2 Test	96.94***	1.08e+07***		522.61***	1.64e+07***
F test			30,234.98***			67,120.17***
AR(1)			0.223			0.073
AR(2)			0.117			0.195
Hansen			0.321			0.197
Obs	201	201	173	201	201	173
Instruments			28			28
Countries	29	29	29	29	29	29

Notes: (1) FGLS, FE-GLS, and GMM refers to feasible generalised least squares, fixed effect feasible generalised least squares and two step system generalised method of moment respectively; (2) *, **, *** represents statistical significance at 10%, 5% and 1% level respectively. The value of the Variance Inflation Factor (VIF) is less than 10 signifying no multicollinearity in the models. The non-significant value of AR (2) and Hansen test for overidentification restriction show no second-order autocorrelation in the error terms and the validity of instruments respectively. Standard errors are in parentheses.

Table 6. GMM Estimate of the Impact of Traditional and Digital Financial Inclusion on Economic Growth for Middle- and Low-Income Countries

	Dependent Variable: GDP per Capita (GDPPC)
	Middle Income Countries						Low Income Countries
	Traditional Financial Inclusion			Digital Financial Inclusion			Traditional Financial Inclusion			Digital Financial Inclusion
	(22)	(23)	(24)	(25)	(26)	(27)	(28)	(29)	(30)	(31)	(32)	(33)
GDPPC-1	0.987*** (0.022)	0.939*** (0.036)	0.967*** (0.062)	1.025*** (0.021)	1.009*** (0.025)	1.009*** (0.040)	1.005*** (0.046)	1.075*** (0.051)	1.003*** (0.073)	0.963*** (0.080)	0.984*** (0.070)	0.966*** (0.00)
TFI	0.005*** (0.0002)						0.006 (0.006)
TADI		0.012*** (0.004)						0.005 (0.006)
TUDI			0.006*** (0.0005)						0.013 (0.008)
DFI				0.005** (0.002)						0.003** (0.001)
DADI					0.003** (0.001)						0.002** (0.001)
DUDI						0.004** (0.002)						0.002** (0.001)
INV	0.022*** (0.001)	0.018 (0.024)	0.073*** (0.018)	-0.021 (0.049)	0.073*** (0.010)	0.045** (0.018)	0.052** (0.021)	0.099*** (0.026)	0.021 (0.030)	0.024 (0.036)	0.040 (0.029)	0.025 (0.035)
POP	0.002 (0.008)	0.003 (0.006)	0.073 (0.072)	0.007 (0.008)	0.002 (0.015)	-0.001 (0.011)	-0.109** (0.040)	-0.137* (0.069)	-0.029 (0.046)	0.013 (0.008)	-0.016 (0.056)	-0.050 (0.068)
TROP	0.025 (0.026)	0.044 (0.030)	-0.010 (0.016)	0.026 (0.003)	0.043 (0.040)	0.027 (0.018)	-0.010 (0.037)	-0.004 (0.027)	0.057** (0.026)	0.048* (0.022)	0.038* (0.019)	0.007 (0.011)
GEX	-0.092*** (0.029)	-0.080** (0.030)	-0.097** (0.036)	-0.045* (0.025)	-0.165*** (0.032)	-0.113*** (0.035)	-0.006 (0.019)	0.004 (0.013)	0.077** (0.032)	0.087*** (0.025)	0.079** (0.030)	0.015 (0.013)
PSE	0.224* (0.118)	-0.165 (0.125)	0.337** (0.114)	0.033 (0.111)	0.455*** (0.125)	0.303* (0.165)	-0.144 (0.217)	-0.289** (0.213)	-0.336* (0.156)	-0.212 (0.159)	-0.238 (0.189)	0.006 (0.204)
INF	-0.002** (0.001)	-0.001 (0.001)	-0.003*** (0.0008)	-0.001 (0.0008)	-0.003*** (0.001)	-0.002** (0.0000)	-0.0001*** (0.0000)	-0.0001*** (0.0000)	-0.0004 (0.0000)	-0.0002 (0.0002)	-0.0002 (0.0002)	-0.0003** (0.0000)
Constant	-0.382 (0.287)	-0.156 (0.336)	-0.445 (0.468)	7.885*** (2.624)	0.925** (0.318)	-0.602 (0.453)	0.995** (0.414)	1.199* (0.648)	0.663 (0.504)	0.236*** (0.565)	0.439 (0.698)	0.375 (0.684)
Mod. Wald	177.64***	168.32***	176.33***	67.01***	58.22***	168.71***	120.50***	139.22***	77.00***	125.05***	117.75***	129.98***
Wooldridge	15.619***	15.488***	16.023***	14.209***	14.322***	14.569***	319.534***	350.729***	353.921***	335.306***	357.907***	308.011***
VIF	3.14	3.26	3.00	2.97	2.97	2.97	1.77	1.82	1.41	1.34	1.30	1.41
D-W-H	7.33**	7.81***	5.90**	6.35**	7.81***	4.43**	8.17***	11.97***	10.74***	12.88***	10.29***	10.52***
F test	57169.48***	51555.43***	5095.02***	27917.94***	8055.61***	3802.90***	2701.01***	3290.16***	179.14***	1813.87***	846.74***	10496.54***
AR(1)	0.124	0.284	0.067	0.362	0.119	0.133	0.601	0.321	0.327	0.260	0.245	0.427
AR(2)	0.300	0.284	0.365	0.197	0.406	0.450	0.226	0.638	0.569	0.228	0.299	0.102
Hansen	0.381	0.814	0.536	0.740	0.814	0.224	0.776	0.112	0.830	0.298	0.769	0.347
CD test	2.193**	1.743*	3.729***	1.506	2.042**	1.645
Obs	89	89	89	89	89	89	84	84	84	84	84	84
Instruments	15	15	15	15	15	15	12	12	12	11	11	13
Countries	16	16	16	16	16	16	13	13	13	13	13	13

*, **, *** represents statistical significance at 10%, 5% and 1% level respectively. The value of the Variance Inflation Factor (VIF) is less than 10 signifying no multicollinearity in the models. The non-significant value of AR (2) and Hansen test for overidentification restriction show no second-order autocorrelation in the error terms and the validity of instruments respectively. Standard errors are in parentheses.

Table 7. Panel VAR Granger causality test

	Full Sample			Middle Income Country			Low Income Country
Direction of causality	Chi Square Statistics	Degree of freedom	p value	Chi Square Statistics	Degree of freedom	p value	Chi Square Statistics	Degree of freedom	p value
GDPPC does not Granger cause TFI	10.039	1	0.002***	4.704	1	0.030**	3.565	1	0.059*
TFI does not Granger cause GDPPC	0.054	1	0.816	1.981	1	0.159	53.764	1	0.000***
GDPPC does not Granger cause TADI	2.082	1	0.149	5.071	1	0.024**	4.722	1	0.030**
TADI does not Granger cause GDPPC	16.370	1	0.000***	0.385	1	0.535	35.719	1	0.000***
GDPPC does not Granger cause TUDI	15.916	1	0.000***	8.302	1	0.004***	17.661	1	0.000***
TUDI does not Granger cause GDPPC	0.309	1	0.578	0.446	1	0.504	141.217	1	0.000***
GDPPC does not Granger cause DFI	22.192	1	0.000***	0.632	1	0.427	30.717	1	0.000***
DFI does not Granger cause GDPPC	2.679	1	0.102	0.307	1	0.579	37.235	1	0.000***
GDPPC does not Granger cause DADI	14.766	1	0.000***	0.561	1	0.454	11.312	1	0.001***
DADI does not Granger cause GDPPC	30.530	1	0.000***	0.174	1	0.677	40.542	1	0.000***
GDPPC does not Granger cause DUDI	5.701	1	0.017**	0.791	1	0.374	32.415	1	0.000***
DUDI does not Granger cause GDPPC	11.326	1	0.001***	0.064	1	0.800	1.366	1	0.243

*, **, *** represents statistical significance at 10%, 5% and 1% level respectively.

Table 8. Robustness Analysis of the Impact of Traditional and Digital Financial Inclusion on Economic Growth using PCSE (Full Sample)

	Dependent Variable: GDP per Capita (GDPPC)
	Traditional Financial Inclusion			Digital Financial Inclusion
	Agg (22)	Access (23)	Usage (24)	Agg (25)	Access (26)	Usage (27)
TFI	0.032*** (0.008)
TADI		0.064*** (0.012)
TUDI			0.016*** (0.006)
DFI				0.008* (0.004)
DADI					0.001 (0.002)
DUDI						0.002* (0.001)
INV	0.016 (0.038)	0.027 (0.039)	-0.002 (0.041)	-0.017 (0.025)	-0.021 (0.025)	-0.011 (0.028)
POP	-0.248*** (0.017)	-0.207*** (0.019)	-0.287*** (0.013)	-0.308*** (0.024)	-0.289*** (0.024)	-0.342*** (0.018)
TROP	-0.009 (0.018)	-0.011 (0.016)	-0.004*** (0.016)	-0.037*** (0.013)	-0.028** (0.013)	-0.058*** (0.013)
GEX	0.023 (0.042)	0.017 (0.040)	0.039 (0.049)	0.075** (0.031)	0.068** (0.030)	0.086*** (0.032)
PSE	0.001 (0.004)	0.002 (0.004)	0.0004 (0.004)	0.001 (0.003)	0.001 (0.003)	0.002 (0.003)
INF	-0.0001 (0.00005)	-0.0001 (0.00004)	-0.0001* (0.00004)	-0.0001 (0.0001)	-0.0001 (0.0001)	-0.0001 (0.0001)
Constant	4.856*** (0.138)	4.580*** (0.150)	5.119*** (0.126)	5.225*** (0.186)	5.086*** (0.182)	5.501*** (0.137)
R-Squared	0.971	0.973	0.967	0.998	0.998	0.997
Wald Chi2	568.68***	428.70***	1014.96***	270.92***	243.83***	729.95***
CD test	2.193**	1.874*	5.007***	4.484***	5.749***	4.147***
Obs	435	435	435	435	435	435
Countries	29	29	29	29	29	29

Note: *, **, *** represents statistical significance at 10%, 5% and 1% level respectively. Standard errors are in parentheses. Agg = indexed using both the access and usage dimensions

Table 9. Robustness Analysis of the Impact of Traditional and Digital Financial Inclusion on Economic Growth using PCSE (Sub-Sample)

	Dependent Variable: GDP per Capita (GDPPC)
	Middle Income Countries						Low Income Countries
	Traditional Financial Inclusion			Digital Financial Inclusion			Traditional Financial Inclusion			Digital Financial Inclusion
	(22)	(23)	(24)	(25)	(26)	(27)	(28)	(29)	(30)	(31)	(32)	(33)
TFI	0.056*** (0.013)						0.004 (0.003)
TADI		0.095*** (0.015)						0.010** (0.005)
TUDI			0.043*** (0.013)						0.0004 (0.003)
DFI				0.013*** (0.005)						0.002* (0.001)
DADI					0.013* (0.005)						0.002* (0.001)
DUDI						0.003*** (0.009)						0.004** (0.002)
INV	0.025 (0.061)	0.047 (0.060)	-0.006 (0.079)	-0.022 (0.040)	-0.011 (0.038)	-0.063 (0.044)	-0.025 (0.022)	-0.027 (0.022)	-0.074*** (0.024)	-0.051* (0.027)	-0.053* (0.027)	-0.047* (0.026)
POP	0.239*** (0.026)	0.250*** (0.024)	0.189*** (0.021)	0.382*** (0.022)	0.379*** (0.021)	0.380*** (0.024)	0.417*** (0.003)	0.419*** (0.003)	0.408*** (0.046)	0.450*** (0.054)	0.439*** (0.054)	0.449*** (0.053)
TROP	0.889*** (0.086)	0.832 (0.080)	1.076*** (0.076)	0.305*** (0.081)	0.310*** (0.079)	0.338*** (0.090)	0.005 (0.011)	0.009 (0.011)	0.011 (0.014)	0.022* (0.013)	0.020 (0.013)	0.022* (0.013)
GEX	0.099* (0.052)	0.084* (0.049)	0.155** (0.068)	0.078** (0.031)	0.070** (0.029)	0.122*** (0.037)	0.033 (0.025)	0.029 (0.025)	0.085*** (0.032)	0.037 (0.030)	0.043 (0.030)	0.032 (0.030)
PSE	0.003 (0.006)	0.002 (0.007)	0.002 (0.010)	-0.003 (0.005)	-0.003 (0.005)	-0.004 (0.006)	0.006** (0.003)	0.005* (0.002)	0.008*** (0.003)	0.006* (0.003)	0.006** (0.003)	0.006* (0.003)
INF	-0.001 (0.001)	-0.0002 (0.002)	-0.001 (0.003)	-0.001 (0.001)	-0.0005 (0.002)	-0.001 (0.002)	-0.00001 (0.00005)	-0.00003 (0.00005)	-0.00001 (0.00006)	-0.00003 (0.0001)	-0.00003 (0.0001)	-0.00005 (0.0001)
R-Squared	0.988	0.989	0.989	0.997	0.998	0.997	0.998	0.998	0.998	0.998	0.998	0.997
Wald Chi2	21796.7***	40952.8***	21009.1***	100736.9***	112110***	75167.6***	76909.4***	68795.1***	94796.8***	130.68***	118.36***	144.28***
CD test	2.193**	1.743*	3.729***	2.572**	2.042**	2.336**	1.504	0.163	0.390	0.736	0.203	0.487
Obs	144	144	144	144	144	144	117	117	117	117	117	117
Countries	16	16	16	16	16	16	13	13	13	13	13	13

*, **, *** represents statistical significance at 10%, 5% and 1% level respectively. Standard errors are in parentheses.

World Bank. (2020). World development Indicator; Time-series. https://datacatalog.worldbank.org/dataset/worlddevelopment-indicators

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