Institutional Quality and Financial Inclusion: Evidence from G20 Economies using Dynamic System-GMM Estimation

This study investigates the impact of institutional quality on financial inclusion across G20 economies. It further examines structural heterogeneity by comparing developed and emerging economies, thereby offering context-specific insights into how governance, economic, and technological factors shape financial inclusion outcomes. The paper constructs a Financial Inclusion Index (FII) based on availability, accessibility, and usage, providing a comprehensive view of financial inclusion. Similarly, the institutional quality index is computed using six indicators. The study utilises data on 81 G20 countries, including the newly inducted African Union from the World Bank and the International Monetary Fund (IMF) for the period from 2014 to 2022. Dynamic System-GMM panel estimation is applied to address endogeneity, persistence, and unobserved heterogeneity. Additionally, separate regressions are conducted for developed and emerging G20 economies to capture differential effects. The results indicate that institutional quality has a significant and positive impact on financial inclusion. Similarly, other macroeconomic variables, such as economic growth, trade openness, and mobile accessibility, positively impact the level of financial inclusion. However, inflation, government expenditure, and internet accessibility have shown an insignificant impact on financial inclusion. Comparative analysis reveals that institutional effects are more pronounced in developed economies, whereas economic growth, trade openness, and mobile penetration play a more significant role in emerging economies. This paper integrates institutional and financial dimensions within a unified empirical framework using multidimensional indices and advanced dynamic estimation techniques. By differentiating between developed and emerging G20 members, the study provides nuanced insights and tailored policy recommendations, bridging a critical gap in comparative financial inclusion literature.