The nexus between economic growth, financial development, financial inclusion and financial innovation in Africa

Abstract

This research explores the connection between economic growth, financial development, financial inclusion and financial innovation in Africa by employing the panel structural vector autoregression using annual data from 2004 to 2018. The vector error correction model Granger causality test was applied to examine directional causality with financial inclusion, financial innovation and economic growth used as dependent variables, and error correction term (ECT) coefficients are negatively significant at one percent for the long-term causality. It shows that the causal association between financial inclusion and financial innovation is explained by the African economy feedback hypothesis. The short-run causality shows a causal connection between economic growth and financial inclusion as well as financial innovation. It means that additional development in any one of these variables (i.e., economic growth, financial innovation and financial inclusion) will have a vital impact on connected variables, which can be noticed in the short run. This is why policymakers and government should consider each of the facets of financial inclusion and financial innovation as they do not merely affect each other; they also affect economic activities, hence fiscal policy is capable of steering more financial inclusions, financial innovation and financial development.