Financial Inclusion, Human Capital Development and Economic Growth in Africa: An Examination of the Transmission Channel

This study set out to investigate the role played by human capital development in the nexus between financial inclusion and economic growth in Africa. We use GMM as the estimation technique to analyze country-level data pooled from 40 African countries from 2005 to 2018. The findings suggest the presence of a non-linear U-shaped relationship between financial inclusion and economic growth. It was also found that human capital development fully mediates the relationship between financial inclusion and economic growth in Africa. Hence, the growth-enhancing benefits of financial inclusion are transmitted through human development. Whilst pursuing their financial inclusion targets, efforts should be made by governments across the African continent to simultaneously improve the level of human capital development to realize the positive benefits of financial inclusion. Providing people with easy access to affordable financial services is seen as one of the surest ways to promote economic prosperity. Whilst some studies have been conducted to test this assertion, their findings are mostly conflicting. We attempt to unravel this puzzle in Africa by arguing that the relationship is both negative and positive depending on the extent to which people have access to financial services. We argue that the possibility that access to finance will promote economic prosperity is dependent on the productive capacity of the people. To empirically test these, we collect archival data across 40 African countries from 2005 to 2018 which we analyzed using the GMM regression technique. We conclude from our findings that, the effect of access to finance on the economy is negative when a large proportion of the population is excluded from the financial system. However, as many more people obtain access to financial services the effect becomes positive. Also, we conclude that access to finance improves overall economic well-being via an enhancement of the productive capacity of the population. Therefore, we recommend that policymakers across the continent speed up their efforts to ensure near-universal access by the adult population to financial services; in that, it is then that the positive benefits on the economy will be guaranteed. Our study did not determine the exact level of access required to transform the effects of access to finance from negative to positive due to data limitations and this can be addressed in future research.