Financial Inclusion and its Determinants: Empirical Evidence from South Asia

ABSTRACT: South Asia, the home to around one-fourth of the world's total population, and the fastest-growing region of the world, achieved an annual average GDP growth rate of 6.6 percent in 2015–2019. During the same period, it also demonstrated a modest share of gross domestic savings and fixed capital formation to GDP. The region has also experienced a considerable success in improving its level of financial inclusion. Within a span of only six years, the number of adults having an account in a formal financial institution increased to 38 percentage points in 2017, though large heterogeneity across countries exists. Despite these economic and financial developments, around half of the world's multidimensionally poor people live in this region. The region is also relatively less inclusive than those of high-income countries, as it excluded 30 percent of its adult population from the formal financial system in 2017. To accelerate its ongoing economic development and poverty reduction, further improvement of the level of financial inclusion is a particular concern in South Asia. However, we know very little about factors influencing financial inclusion in this region. In this paper, we examine the determinants of financial inclusion in South Asia using the World Bank's Global Findex database for the year 2017. Our probit estimations show that being a male, richer, more educated, and older are associated with higher levels of formal account and formal saving. While age and education affect formal credit in a similar manner, we find no significant association between gender and income level with formal credit. We also investigate how individual characteristics are associated with the barriers to financial inclusion and find that women exclude themselves from financial inclusion because other family member might have an account. Documentation and having accounts by other family members are the main factors of financial exclusion of the younger people, while cost and religious reasons discourage older people from having a bank account. Finally, we compare the determinants of informal financial services with those of formal financial services. Our findings have certain policy implications to include financially excluded people, i.e. poor, less educated, youth, and women, into financial network vis-à-vis promoting financial inclusion in South Asia.