DANANJANI BASNAYAKE, ATHULA NARANPANAWA, SAROJA SELVANATHAN AND JAYATILLEKE S BANDARA |
In recent years, digitalisation has become a key driver of financial inclusion across the Asia-Pacific region, contributing significantly to economic growth and fostering sustainable development. The rapid growth of digital financial services, including mobile banking, e-wallets, and fintech solutions, has revolutionised access to financial systems. This potentially reaches many new people who are unbanked or underbanked, which is crucial in a region where access to traditional banking services has historically been limited. Digital financial platforms reduce transaction costs, improve transparency, and offer greater accessibility, allowing individuals and businesses to save, invest, and borrow more efficiently.
Key findings from the study
The study analysed data from 30 Asia-Pacific countries over 2014-2021 to assess the impact of Digital Financial Inclusion (DFI) on economic growth. A key contribution of the research is the development of a DFI index using a three-stage principal component analysis for the Asia-Pacific region. This index captures both traditional and digital elements of financial accessibility and usage, providing a more holistic picture of financial inclusion in this region.
The researchers found a significant positive relationship between DFI and economic growth. Countries that expanded their digital financial services saw higher GDP growth rates, confirming the importance of DFI in driving development. The findings support key economic theories, such as the Theory of Finance and Growth, which suggests that improved financial systems boost productivity and growth, the system theory which explains how enhancement in financial inclusion through the existing system brings favourable outcomes to existing economic, financial and social subsystem and diffusion theory of innovation to understand at what rate the technological advancement spread in the social system in stimulating the economic outcome.
Moreover, the study employed the panel threshold regression model to assess if DFI has a threshold effect on economic growth because the linear model does not capture it. This examines DFI’s optimum level or minimum turning point that brings positive economic growth. The researchers found that the effect of DFI on economic growth is high in regimes with low DFI, while it is positive but substantially low in regimes with high DFI, confirming a non-linear inverted U-shaped impact of financial inclusion on economic growth. This highlights the existence of a “threshold effect”—at the early stages, the level of DFI contributes to the improvement of economic growth at an increasing rate; however, when the level of DFI reaches the optimum level, the marginal effect of DFI on economic growth starts to decline.
Policy implications and recommendations
The findings of this study bring important policy implications for governments, international organisations, and financial institutions aiming to promote inclusive economic growth through digitalisation. Some key recommendations include:
- Leverage digital technology for financial inclusion: Policymakers should prioritise digital technology in financial inclusion strategies, considering the economic resources and income levels of each country. In doing so, it is essential to focus on both the digital and financial literacy of the economic participants.
- Support innovation and Infrastructure: Countries need to invest in digital finance infrastructure, making it easier for people to access financial services. Regulatory measures should be put in place to manage risks and build public trust in digital finance.
- Increased engagement of financial institutions: Commercial banks and traditional financial institutions should be encouraged to participate in digital financial initiatives. They must offer user-friendly, affordable products that are more attractive than traditional options to encourage adoption.
- Reinforce business activity: Digital finance enables small transactions, opening up new business opportunities. Policies should ensure widespread internet access and mobile phone availability to support digital financial ecosystems.
- Promote digital wage payments: Shifting from cash to digital wage payments can improve financial inclusion by increasing account ownership and usage. Workers can use digital accounts for various financial services, which ensures enhanced usage of digital finance.
- Empower women with digital finance: Digital financial services can increase women’s financial autonomy, leading to better spending on nutrition, education, and health. Initiatives like wage digitisation in Bangladesh and AI-driven loan services in China are examples of successful DFI efforts that can be replicated.
These recommendations align with Sustainable Development Goal 8, focusing on sustained, inclusive, and sustainable economic growth. Replicating successful strategies across the region can help achieve broader financial inclusion and economic growth through digitalisation.
The way forward
The Asia-Pacific region stands at a critical stage where digitalisation can be harnessed to unlock unprecedented opportunities for economic growth and inclusion. By adopting policies that promote digital financial inclusion and investing in the necessary infrastructure, countries in the region can support sustainable development goals and improve the livelihoods of millions of people.
The path to inclusive growth is clear: digital financial inclusion must be at the forefront of economic policy, ensuring that no one is left behind in the digital age.
Dananjani Basnayake, Athula Naranpanawa, Saroja Selvanathan and Jayatilleke S Bandara are members of the Griffith Asia Institute.
This article is a synopsis of the journal article, Financial Inclusion through Digitalization and Economic Growth in Asia-Pacific Countries, published in the International Review of Financial Analysis, written by Dananjani Basnayake, Athula Naranpanawa, Saroja Selvanathan and Jayatilleke S Bandara.
