A trajectory of financial inclusion: An empirical analysis of Ghana households : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

The need for a paradigm shift towards inclusive growth has recently received increased attention from governments and policy-makers. Financial inclusion plays a central role in inclusive growth. This is because financial inclusion is an enabler of economic growth, poverty reduction, income inequality reduction and women empowerment, especially in developing countries such as Ghana. Notwithstanding these benefits, the level of financial inclusion in Ghana is low. The World Bank provides a roadmap (the gateway to financial inclusion) on how to move people from being unserved (financial exclusion) to being served (financial inclusion). This roadmap highlights the need for households to have access to formal financial services such as payments, credit, savings, insurance, and remittances. This means that measuring the level of a country’s financial inclusion must include these services for it to be representative. Previous studies focused on banks and neglected other financial intermediaries, such as insurance companies (insurance financial services) in creating a financial inclusion index to measure a country’s level of financial inclusion. This study includes insurance in creating a financial inclusion index for Ghana for our study period (1980 to 2021) to find that there have been improvements in the level of financial inclusion during that time. This suggests that several financial sector reform programmes implemented in Ghana, as well as legal and regulatory reforms in the banking and insurance sectors, have had a positive impact on financial inclusion in Ghana. The financial inclusion score average was 0.25 for Ghana for the study period, which categorizes Ghana as a low financial inclusion country per Sarma’s (2008; 2012) categorization. Overall, however, the upward trend in financial inclusion in Ghana during the study period is an encouraging sign for the push to ensure all Ghanaian households are financially included. The study investigates what factors drive financial inclusion in Ghana and finds financial inclusion has a positive, significant relationship with GNI per capita and MSCPS in Ghana. Conversely, the study finds a negative relationship between financial inclusion and the real effective exchange rate. Government spending, inflation and money supply are negatively but insignificantly related to the level of financial inclusion in Ghana. Finally, I find that insurance and financial service imports (positive), urbanization (positive), mobile money availability (positive), fixed telephone ownership (negative), and remittances (positive) had no influence on the level of financial inclusion in Ghana during the study period. The literature suggests that there is no consensus on the direction of the relationship between financial inclusion, poverty and income inequality. To investigate the direction of the relationship for Ghana, the study runs an ordinary least square multiple regression using household consumption (a proxy for poverty) as the dependent variable, which is regressed against several independent factors including our comprehensive financial inclusion index. I find that level of financial inclusion, which averages 0.25, did not improve household consumption (reduce the prevalence of household poverty) in Ghana during the study period. A possible explanation could be the structure of the financial system of Ghana is not well-developed and financially included (Ghana is classified as low financial inclusion country with an average financial inclusion score of 0.25) to reach majority of the households (especially poorer individuals and households) to effectively reduce the prevalence of poverty in Ghana positively. The ineffectiveness of the financial sector in the allocation of funds causes low labour productivity, which increases the prevalence of poverty amongst households. In addition, an underdeveloped financial system with a low level of competition creates an ineffective financial system and discourages improvements in the level of financial inclusion in an economy. Our finding is supported by a recent study that found household consumption improved countries that had a financial inclusion index score of 0.356 or higher. For the relationship between financial inclusion and Human Development Index (HDI), which is the proxy for income inequality in this study, I find that financial inclusion positively and significantly influences HDI in Ghana. A possible explanation could be that financial inclusion enables households and individuals to afford education to build their skill and capacity, which can help them to secure employment with better and sustainable disposable income to reduce the overall level of income inequality in the country. Access to finance (through borrowing from the financial sector) can support the financial needs of individuals and households as well as help those individuals with entrepreneurial ambition to start small businesses, which can generate further income for them. Further, access to the financial sector helps individuals to save and invest their excess disposable income to generate investment income. Therefore, financial inclusion helps to reduce the level of income inequality amongst households in Ghana. I also find that the GDP per capita growth, ICT literacy and personal inward remittances have positive, significant effects on the HDI level in Ghana, whereas government spending and rural population growth have an inverse effect on HDI. Inflation (negative) and trade openness (negative) both have an insignificant impact on HDI in Ghana over the study period. I also find that FII*GNI per capita is positive and significantly impacts the HDI. An index to measure the level of women’s empowerment in Ghana is missing from the Ghanaian empirical literature. This study uses the PCA approach to create a women empowerment index for Ghana using four dimensions (labour and economics; good-life and health; politics, governance and leadership; and education and skill building) to find that the level of women’s empowerment improved year-on-year during the study period (1990 – 2021). Despite the fact that many studies have suggested that financial inclusion improves women’s empowerment (and vice versa), a study examining the direction of the relationship is missing from the Ghanaian literature. This study investigates the relationship and finds that financial inclusion and women empowerment are positively related during the study period, which means Ghanaian women are increasingly being empowered as time passes. In investigating the relationship between financial inclusion and women’s empowerment, I find that labour and economics, and politics, governance, and leadership exhibit positive, significant relationships with the level of financial inclusion in Ghana whereas good-life and health, and the education and skill building dimensions exhibit a positive but insignificant relationship with financial inclusion in Ghana over the study period.