Financial inclusion : the role of financial system and other determinants
The promotion of access to finance is considered as a top priority agenda in many countries. Finding the related and strong factors to enhance financial inclusion is therefore becoming crucial. Despite many studies on the factors associated with financial inclusion, the role of financial system has not been well explored. Leyshon & Thrift (1995) shed new lights on this issue by stating that “Although the criteria for exclusion may vary over time, the financial system has an inherent tendency to discriminate against poor and disadvantaged groups”. This thesis, therefore investigates the role of financial system and other determinants in shaping financial inclusion, based on institutional theory. The design of the study takes account two lacunae in our current understanding of this topic. Firstly, despite the fact that the financial inclusion literature is voluminous, it is perhaps surprising that relatively little research has been carried out on the effect of Islamic finance on financial inclusion, given its possible significant role as one of the contributing factors that creating and shaping financial inclusion. Empirically testing for the effect of Islamic financial sector (as proxied by Islamic banking presence) is challenging because the data on Islamic banking are imperfect since there is no single accepted definition of an Islamic bank nor is there a single and comprehensive database on it. To this juncture, our understanding in this field remains incomplete. Secondly, besides the role of financial system, empirical evidence on the other financial inclusion determinants is relatively lacking and far from conclusive. Notably, a direct or indirect relationships and significance levels are commonly observed. Under the notion of institutional theory, the institutional settings are heterogeneous, and therefore affect the institutional differences and in turn increased structure of the financial inclusion level. In response to these two major issues, this study employs empirical research methods, namely cross-sectional pooled regression, panel data regression, and quantile regression to analyze a set of samples consisting of 80 countries, drawn from the Financial Access Survey (FAS, 2011) over the years 2007 through 2011. The financial inclusion levels are estimated using the cumulative index of financial inclusion (CIFI) which is constructed based on Sarma (2008, 2010) method while the Islamic banking presence variables (i.e., the number, size and profitability of Islamic banks) are used to proxy for the countries’ type of financial system. Although not largely prevalent, using the Islamic banking presence as the proxy for Islamic financial sector has found some empirical support on its relationship with the incidence of financial inclusion. To a certain extent, this thesis presents fresh empirical evidence and renewed interpretation of the role of institutional settings in shaping financial inclusion. As far as the institutional theory is concerned, the use of quantile regression method in the present study represents a novel approach in further investigating the effects of the institutional settings on the levels of financial inclusion. The results reveal that the determinants of financial inclusion, particularly the institutional settings, are heterogeneous across the whole distribution of countries, consistent with the notion of heterogeneity as purported by Zucker (1987) and further extend the view that heterogeneity only evidenced within the organizational level. The findings demonstrate twofold; firstly, institutional settings are shaped and designed to be consistent with financial inclusion enhancement for both at lower and higher level of financial inclusion. Secondly, the quantile regression does not only further supports financial inclusion is institutionally-driven, but more importantly offers renewed insights on the heterogeneity aspect of the institutional theory.
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