IMPACT OF FINANCIAL DEVELOPMENT AND FINANCIAL INCLUSION ON ECONOMIC GROWTH: A NON-LINEAR APPROACH

Abstract

The “too much finance” hypothesis suggests that while financial development (like expanding credit, banking, and markets) generally supports economic growth, there’s a threshold beyond which further financial expansion can actually harm economic growth. This study explores the impact of financial development and financial inclusion on economic growth in non-linear settings. Using the dataset covering 57 countries over the period 1990-2023. The study employs the system generalized method of moments (S-GMM) to avoid the issue of endogeneity. The result identifies a turning point beyond which financial development has a negative relation with economic growth. The results indicate that economic growth initially rises with increasing financial inclusion, but beyond a certain point, further increases in financial inclusion lead to a decline in economic growth. This study also helps to gain a great understanding of the topic, which may help in the macro-economic policies and their main objective is to achieve economic growth, which ultimately contributes to the well-being of society. The findings emphasize the importance of policymakers recognizing the nonlinear role of financial development and financial inclusion on economic growth. Policymakers in these countries need to develop macro-economic policies that will promote financial development and financial inclusion while enhancing the regulation and functioning of domestic financial markets to ensure that all citizens are adequately served through the available financial instruments, products, and service offerings. Under this policy framework, greater emphasis should be placed on enhancing productive sectors to stimulate and sustain economic growth.