Inclusive Finance, Banking Sector Development, and Economic Development: the Moderating Role of Digital Finance

Purpose: This paper investigates the moderation role of digital finance in the relationship among inclusive finance, banking sector development, and economic development in Africa. Design/Methodology/Approach: We construct indices through the Principal Component Analysis to measure inclusive finance, digital finance, and banking sector development in a panel of 39 selected African countries over the period, 2004-2022. Subsequently, we employ the two-stage system Generalized Method of Moments estimator to examine the moderating effect of digital finance on the key variables. Findings: The results showed persistence of economic development with its lag recording positive and statistically significant relationship with the dependent variable. This result suggests that earlier levels of economic development serve as positive and significant drivers of the current levels of economic development. The results also indicate that digital finance can spike economic development in the presence of inclusive finance and banking sector development. We document evidence of negative impact of increasing population growth on economic development. Originality: This paper provides the first empirical evidence of the moderating role of digital finance on the effect of inclusive finance and banking sector development on economic development from the African perspective. Practical Implication: The promotion of digital finance applications will improve inclusion and banking development which will enhance economic development, while inclusion policy should be able to address the bottlenecks such as inadequate digital infrastructure. Social Implication: Greater access to finance through digital finance can promote banking sector development which can substantially support poverty alleviation and long-term development resulting into economic development.