The Impact of Digital Finance on Financial Inclusion in East African Countries

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Abstract

This study develops an evaluation framework for the digital effect on the financial inclusion that can be used to compare different countries. It measures the amount that is digital financing and financial inclusion across nine countries and calculates an index of these two concepts using secondary data from the World Bank's as well as the International Monetary Fund. Subsequently, the researcher uses panel data and methodology for nine nations to investigate the relationship between digital banking and financial inclusion. Employed STATA version 18 for analysis and the fixed-effects model of econometric instruments. The researcher created DF and FI indices using PCA across nine East African countries (EAC) for fifteen years period in order to evaluate the impact. This index was created by combining a number of important financial inclusion and digital finance metrics. Based on these components stayed calculated using the principal component analysis method which the mean value of 0.00000444 indicates that there was negative use of digital finance in the Eastern African countries (EAC) from 2008 to 2022. This implies that digital finance in EAC is like infant age in the region. However, in terms of digital money usage, Kenya leads the pack, Ethiopia is in the middle, and the rest lag behind. The E AC's Digital Finance varies from the mean by 1.000001, with the largest value in the region being 2.809177 and the minimum being − 1.846987. The results show that there is a significantly positive relationship between digital finance and financial inclusion through East African countries. As a result, automated machine tellers and digital finance have a significant positive impact on financial inclusion, while income, population density, and the growth of the rural population have a negative significant effect.

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