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Digital Financial Inclusion and Implications for Developing Countries

Economic Growth

Article in Journal of Developing Economies · June 2023

DOI: 10.20473/jde.v8i1.38361

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 JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48

JDE (Journal of Developing Economies)

[Link]

DIGITAL FINANCIAL INCLUSION AND IMPLICATIONS FOR

DEVELOPING COUNTRIES ECONOMIC GROWTH
Misbahol Yaqin*1
Sugiharso Safuan2
1, 2
Department of Economics, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia

ABSTRACT ARTICLE INFO

This study aims to develop a model to measure financial inclusion by Received: August 18th, 2022
incorporating the evolution of digital finance and identifying its relationship Revised: December 16th, 2022
with GDP growth in emerging nations. Data used are from 51 developing Accepted: January 26th, 2023
countries in 2014 and 2017. Principal component analysis (PCA) was used Online: June 15th, 2023
to create the Digital Financial Inclusion Index. The fixed effects model (FEM)
is used to estimate the association between the inclusion of digital finances *
Correspondence:
and economic growth. According to the study, metrics of digital financial Misbahol Yaqin
inclusion in emerging nations are in the middle. Compared to other E-mail:
research, the financial inclusion indicator in this study strengthens it. The misbahol17@[Link]
study discovered that the inclusion of digital finance enhances GDP growth
in developing nations after testing the influence of digital financial inclusion
on GDP growth in developing countries.
Keywords: Digital Financial Inclusion, Fintech, Economic Growth
JEL: G10; G20; G21

To cite this document: Yaqin, M., & Safuan, S. (2023). Digital Financial Inclusion and Implications for Developing Countries Economic
Growth. JDE (Journal of Developing Economies), 8(1), 29-48. [Link]

Introduction
Financial inclusion is an essential strategy for sustainable development (Erlando et
al., 2020; Shihadeh & Liu, 2019; Yin et al., 2019). Because economic opportunity is related to
access to financial services and involvement in the development process for all social classes,
the importance of financial inclusion is well known, but there is no formal consensus on its
definition or behavior (Ismael & Ali, 2021; Wang & Guan, 2017). Researchers have created
various approaches and indicators to assess the level of finance inclusion and its effect on
economic growth (Cámara & Tuesta, 2014; Sarma & Pais, 2008; Wang & Guan, 2017). Empirical
evidence on financial inclusion varies due to the methodology, indicators, and object of study
considered.
The focus of financial inclusion is measured by a single indicator, such as ATMs, bank
branches and accounts of financial institutions, as well as by combining various indicators
to composite indexes (Honohan, 2008; Okoye et al., 2017; Sarma & Pais, 2008). Financial
inclusion measurement still focuses on aspects of traditional financial services, which mainly
rely on physical (Shen et al., 2021). However, previous measures of financial inclusion levels
need to fully capture the contribution of technology’s critical role in providing better public
access to financial services.
JDE (Journal of Developing Economies) p-ISSN: 2541-1012; e-ISSN: 2528-2018
DOI: 10.20473/jde.v8i1.38361

(CC-BY)
Copyright: © 2023 by the authors. Submitted for possible open access publication under the terms and conditions of the Creative
Commons Attribution 4.0 International (CC-BY) license
 Digital Financial Inclusion and Implications
Yaqin, M., & Safuan, S.
for Developing Countries Economic Growth

Adopting digital technology in the financial industry provides a different dynamic

(Ismael & Ali, 2021). By using digital means, the financial industry can provide financial services
without going through physical contact like traditional financial services. There has also been a
recent increase in the use of digital technology in the financial industry. Data from WB Findex
shows that digital service indicators experienced significant growth of 12%, compared to
traditional services, which only grew 6% globally from 2014 to 2017. Digital financial services
can reduce barriers to accessing traditional financial services such as costs, geography, and
information asymmetry (Liu et al., 2021). Because this condition has important implications
for financial inclusion, the measurement used must be dynamic in the sense of adjusting the
development of access to banking when there is a change in digital technology (Khera et
al., 2021; Tram et al., 2021). The measurement problem will have a different impact on the
conclusions given (Cámara & Tuesta, 2014; Park & Mercado, 2018). Therefore, incorporating
the digital aspect of technology into the measurement of financial inclusion can provide a
more comprehensive understanding of the conditions and developments of the digital aspect
in promoting financial inclusion.
Financial inclusion studies that include aspects of digital technology or what is known
as digital financial inclusion still need to be completed. Recent research has measured the level
of digital financial inclusion by looking at relevant indicators, such as mobile accounts, digital
financial transactions, and several other indicators (Liu et al., 2021; Minh et al., 2020; Shen et
al., 2021). However, the study captures one aspect of digital financial inclusion at a time and
cannot compare its progress. Moreover, some studies must provide a comprehensive picture
to combine various aspects, including access and use. Some of these studies also needed to
provide further analysis regarding the validity of the resulting measurements.
This study aims to fill the gap in the previous literature by developing a measure of the
degree of financial inclusion by including digital aspects. Sarma (2016) explains that measuring
the degree of financial inclusion is one of the main components of providing a financial inclusion
development strategy. The focus of the study in this research is on developing countries. This
is because financial inclusion remains a major challenge in developing countries where the
benefits of the digital era are not shared equally due to limited infrastructure, gaps between
poor and rich households, and lack of financial literacy (Le et al., 2019; Park & Mercado,
2018; Tram et al., 2021). This study contributes to building a digital financial inclusion index
in developing countries by including digital financial aspects for 2014 and 2017. The index
comprises financial service access and uses indices based on the most recent World Bank
data and the IMF’s Financial Access Survey (FAS) on digital financial services in the financial
industry.
There are several benefits to building a digital financial inclusion index in this study.
One is to provide a comprehensive degree in financial inclusion by including digital channels.
Second, by looking at financial inclusion from several aspects rather than relying on one
indicator, this study allows this research to capture the contribution of digital financial services
to financial inclusion from a multidimensional perspective. Thus, this measurement of digital
financial inclusion is also needed to study the impact of various initiatives by stakeholders
and to decide on future actions. One of them is the economic impact, especially on economic
growth. Kim et al. (2018) explained that digital financial inclusion is one of the priority efforts
in supporting inclusive growth to create prosperity.
Overall, this research has two main topics. The first is to assess the extent of financial
inclusion in emerging nations by considering the advancement of digital technologies.

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 JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48

Measurement of digital financial inclusion used the PCA method. Meanwhile, the second
subject of this research is to identify the relationship between digital financial inclusion and
economic growth in developing countries.
Literature Review
Digital Financial Inclusion
Digital financial inclusion (DFI) extends the previous financial inclusion. A more
standardized concept and framework for digital financial inclusion come from the World Bank.
DFI is a digital approach to expand the coverage and access to financial services by all circles
of society by applying related digital technologies in the financial sector (World Bank, 2022).
Yang & Zhang (2020) explained that DFI has several benefits. One of the benefits of financial
inclusion is the rising availability and reach of financial services. DFI improves efficiency and
reduces information asymmetry in financial services.
Previous measures to measure levels of financial inclusion need to fully capture the
contribution of technology’s increasingly important role in financial services. The use of
digital technology in the financial industry is overgrowing in developing countries. Therefore,
including financial inclusion through fintech can provide a more comprehensive understanding
related to the conditions of financial inclusion. Studies that include aspects of digital services
in measuring financial inclusion still need to be more comprehensive (Ismael & Ali, 2021;
Khera et al., 2021; Shen et al., 2021; Yang & Zhang, 2020). However, some of these studies
only looked at DFI from a single point in time, so they cannot be compared, more than not
presenting a comprehensive picture to combine various aspects, including access and use.
Despite the recent literature on digital financial inclusion, the existing literature mainly focuses
on experiences in certain countries such as China (Ahmad et al., 2021; Liu et al., 2021); Egypt
(Ismael & Ali, 2021); the Middle East and Central Asia (Blancher et al., 2019). There still needs
to be more financial inclusion focused on developing countries. Several previous studies found
that financial inclusion is still uneven in developing countries caused of several factors such as
financial infrastructure, low financial literacy, macroeconomic conditions, and several other
factors (Abubakar et al., 2020).
Empirical Study of Digital Financial Inclusion and Economic Growth
The link between DFI and economic growth has been recognized in previous research
(Van et al., 2021). Sethi & Acharya (2018) explained that financial inclusion (FI) supports the
economy through two events. First, FI increases access to financial services at an affordable cost
among the public. This condition can be used to increase community production, increasing
output, and economic growth. The second way is that, with a more significant FI, people can
more easily access financial products such as savings and insurance. This condition will increase
financial market funds that can be allocated efficiently in the form of investment (Safuan et
al., 2021; Wardhono et al., 2016). This process also generates more output and employment,
which leads to an increase in income distribution and economic growth (Mardanugraha et al.,
2018; Wardhono et al., 2019).
Studies examining the relationship between economic growth and DFI are still relative.
Although most financial inclusion studies find a positive relationship with economic growth,
the question is whether this condition also applies to digital financial inclusion. Liu et al. (2021)
analyzed the relationship between DFI and economic growth in China. The DFI data used are
derived from the DFI index built by Peking University. The method used is Vector Autoregressive
(VAR). The study by Liu et al. (2021) found that DFI encourages economic growth in China. It

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 Digital Financial Inclusion and Implications
Yaqin, M., & Safuan, S.
for Developing Countries Economic Growth

occurs through a positive effect on increasing public consumption and developing MSMEs.
DFI improves public and MSME access to financial services. With the convenience offered by
the digital aspect of financial services, the public can quickly obtain the wrong funds used
for consumption. Then, a larger DFI supports the performance of MSMEs by increasing the
income used to support their business activities.
Furthermore, Ahmad et al. (2021), using data from 2011-2018 in 31 provinces in China
using panel data regression, found that the DFI and human resources drive economic growth
in China. Policymakers in China use fintech to provide digital financial services for all segments
of society at low and affordable costs expected to support economic growth. Lai et al. (2020),
using 2010-2016 data in China, found that households cannot afford insurance when there
is a permanent shock to income, but they can mitigate about 70% of a temporary shock to
income. Research by Lai et al. (2020) also finds that DFI reduces the ability of households to
insure against transitory income shocks. Therefore, this study will also add to the literature
discussing DFI and economic growth.
Data and Research Methods
Data
This research will focus on developing countries. The data used is the data of 51 countries
that fall into the category of developing countries. The categorization of these countries is
based on the IMF World Economic Outlook 2021. Moreover, the data used also consider the
availability of existing digital financial inclusion indicator data because some countries have
limited availability. Since 2011, Global Findex survey data is only available every three years,
so this index was created for 2014 and 2017. Data volume for digital financial services in 2011
is relatively limited. Digital financial inclusion data utilize the availability of data sourced from
WB Findex, FAS IMF, and the International Telecommunication Union (ITU).
Second, after identifying the financial inclusion level in developing countries, this study
also attempts to conduct a cross-country test of digital financial inclusion on economic growth.
Economic growth data is provided by the World Bank. Moreover, in the research model built,
this study includes several control variables, including government spending, FDI, trade
openness, and population. All data are sourced from the World Bank. Overall, the summary of
the data in the study is shown in Table 1.
Table 1: Data
Variable Definition Unit Source
Digital The financial inclusion index was built using eight Index IFS, ITU, and
Financial financial inclusion indicators: the number of ATMs, World Bank
Inclusion (DFI) bank branches, accounts, loans, digital transactions,
mobile subscriptions, percentage of people who have
internet access.
GDP Gross Domestic Product Per capita (2010 USD constant). nominal World Bank
Government Percentage of government spending to GDP. Percent (%) World Bank
Expenditure
(GE)
FDI Percentage of total FDI to GDP. Percent (%) World Bank
Population Population using an annual population growth rate Percent (%) World Bank
Trade Total imports and exports of goods and services are Percent (%) World Bank
measured as a percentage of GDP.

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 JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48

Development of Digital Measurement of Financial Inclusion

Digital Financial Inclusion Indicators
This study develops a model to measure Digital Financial Inclusion (DFI) by detailing
the evolution of digital technologies in the financial industry. The financial inclusion index
in this study was adopted from the study of Wang & Guan (2017) and then developed by
including digital financial inclusion indicators in its construction. Like Wang & Guan (2017),
this study includes two dimensions of financial inclusion: the access dimension on the supply
side and the usage dimension from the demand side of financial services.
The first dimension is the access dimension. Inclusive financial services must be easily
accessible to the public (Sarma, 2012). The indicators used are based on financial inclusion
indicators from the World Bank related to access, namely ATMs, bank branches, internet
access, and mobile subscriptions. Cámara & Tuesta (2014) said the number of ATMs and
bank branches considers the physical point of commercial service banks offer. The spread
of ATMs and bank branches allows the public to use formal financial services. The number
of ATMs and bank branches is also used as a representative of access to financial services in
the study of Beck et al. (2007), Sarma (2012, 2016), and Van et al. (2021) describe the per
capita size of branches and ATMs used to capture the demographic penetration of the banking
sector. Meanwhile, the World Bank (2022) explains that subscriptions and internet access are
essential digital infrastructures for digital access to financial services. These two indicators
are important components that provide new channels for accessing digital financial services
(Banna & Alam, 2021; Khera et al., 2021a; Shen et al., 2021).
In the dimensions of use, several indicators used in this study are also based on
indicators of use for financial inclusion from the World Bank, namely the number of accounts,
deposits, loans, and digital transactions. Sarma (2016) explains that using an account is a
primary aspect of using financial services provided by banks. Several previous studies also
used account indicators, such as Sarma (2012, 2015) and Wang & Guan (2017). The amount of
deposits and loans used follows the usage indicators from the World Bank, which is a product
of financial services. Digital transactions are services of digital finance. Beck et al. (2007)
explained that bank deposits and loans are the primary services offered by banks. Beck et al.
(2007) interpret more deposits and loans as a signal of more significant service usage. Beck
& Demirgüç-Kunt (2008), Gupte et al. (2012), and Sarma (2016) also use deposit and loan
indicators as indicators of financial inclusion in terms of usage. Moreover, the World Bank
(2022) explains that digital transactions are an essential indicator in viewing digital financial
inclusion in terms of usage. It is used to find out whether the use of financial services is fully
utilized both through physical and digital access.
Table 2: Summary of Digital Inclusion Financial Indicators
Dimension Variable Definition Unit
ATM Number of ATMs/100,000 Adults Numerical
Access BANK Number of Bank Branches/100,000 Adults Numerical
(banking
penetration) Mobile Mobile subscription/100 people Numerical
Internet Percentage of people who have internet access Percent (%)
Account Percentage of people who have a financial institution account Percent (%)
Deposit Outstanding Deposits (% of GDP) Percent (%)
Usage
Loan Outstanding Loans (% of GDP Percent (%)
Dtrans Digital Transaction with Made or received digital payments (% age 15+) Percent (%)

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 Digital Financial Inclusion and Implications
Yaqin, M., & Safuan, S.
for Developing Countries Economic Growth

Digital Financial Inclusion Index Development Approach

The method used in building the financial inclusion index in this study is Principal
Component Analysis (PCA). This methodology was also used in previous studies, such as the
study by Park & Mercado (2018), Ahamed & Mallick (2019), Sahay et al. (2020), and Tram et al.
(2021), and several other researchers. PCA is used to adequately capture the overall variability
between these correlated components of financial inclusion as a single measure (Ahamed
& Mallick, 2019). In summary, PCA research has two estimation stages in the index creation
process. In the first stage, the research estimates the scores of the two dimensions (sub-index)
of access and use and the weight of each indicator. It is used to determine the contribution
of indicators in shaping access and use in financial inclusion. The study estimates the overall
DFI index and dimensional weights in the second stage. Before applying PCA, the metrics for
each aspect were standardized due to the different units of measurement between variables,
so the measurement scale was immaterial. In PCA, data processing is done using Stata 16
Software.
The first level of PCA is intended for dimensional access of Y ita and use Y itu in the
following:

Y ita = c1 ATMit + c2 BANKit + c3 Mobileit + c 4 Internetit (1)

Y itu = d1 Accountit + d2 Depositit + d3 Loanit + d 4 Dtransit (2)

After obtaining a score for each dimension, the study continued to the second stage
of PCA. Like the first stage, it used scores on the resulting access and used dimensions (IFI
sub-index) to obtain a digital financial inclusion index.

DFIit = w1 Y ita + w2 Y itu (3)

Where DFI is a composite index of digital financial inclusion (DFI), w1, w2 is the relative
weight for each dimension of DFI. Finally, the study obtained the weight of each dimension,
wk , in the index DFI with the following equation:

/ 3
j=1
m j { jk
(4)
wk = , k = 1, 2, 3
/ 3
j=1
mj
Where m is the eigenvalue of each principal component. { is the factor loading of
each sub-index. Moreover, the weights for the dimensions of access and use are also obtained
using the same schema in Equation 4.
The Correlation of Digital Financial Inclusion and GDP Growth
This study, in particular, used a panel model to investigate the influence of DFI on GDP
growth. First, the study makes a panel data regression model with a logarithmic transformation
of GDP so that the relationship between DFI and economic growth can be estimated using
these data. The model built in this study was adopted from the study of Sethi & Acharya
(2018) and Khera et al. (2021), who also examine financial inclusion and economic growth.
The panel model for this study is:

ln GDPit = b 0 + b1 DFIit + b2 GEit + b3 FDIit + b 4 POPit + b5 TRADEit + f it (5)

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 JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48

In this model, the dependent variable is GDP which describes economic growth, and the
independent variable is DFI. This model considers GE, FDI, POP, and TRADE control variables.
Control variables are included in the panel model estimation, one of which to minimize is the
omitted variable bias (OVB). Incorporating government expenditure controls (GE) based on
studies by Sethi & Acharya (2018) and Van et al. (2021), then foreign direct investment based
on Kim et al. (2018), Chatterjee (2020) and Van et al. (2021), population and trade control
based on Kim et al. (2018), Sethi & Acharya (2018) and Van et al. (2021). Moreover, to get a
good model, whether PLS, Random Effect Model, or Fixed Effect Model, one of them will be
tested with the Hausman and LM tests.
Result and Discussion
Digital Financial Inclusion Index
In the first stage of PCA, it is used to determine the contribution of each indicator in
obtaining the value of the access and usage dimensions. The contribution is known from the
resulting weight. Before implementing the first stage of PCA, it is necessary to carry out the
Kaiser-Meyer-Olkin test. This test ensures that the adequacy of the sample and the selected
indicators are correlated.
Table 3: Kaiser–Meyer–Olkin Test in First Stage PCA
Access dimension Usage dimension
Variable KMO Variable KMO
ATM 0.6953 Account 0.6038
BANK 0.7950 Mobile Transaction 0.8538
Mobile 0.7820 Deposit 0.6990
Internet 07497 Loan 0.6103
Overall 0.7429 Total 0.6558

The results of the KMO test in Table 3 show that the KMO test value is greater than
or equal to 0.5, in the sense that the research sample size is sufficient and the indicators
used in this study are correlated. KMO for the access dimension is 0.74, and KMO for the
usage dimension is 0.65. With these results, the analysis can be continued for PCA estimation.
Furthermore, Table 4 presents the outcome of the first PCA stage.
Table 4: Principal Component Analysis Estimation in First Stage
Access dimension
Variable PC1 PC2 PC3 PC4 Norm Weight
ATM 0.5665 -0.0453 -0.1772 -0.8046 0.253883
BANK 0.3732 0.8905 0.1968 0.1705 0.440964
Mobile 0.5002 -0.4127 0.7289 0.2193 0.321518
Internet 0.5382 -0.1862 -0.6327 0.5248 0.261139
Eigenvalues 2.44017 0.79922 0.448463 0.312146
Usage dimension
Variable PC1 PC2 PC3 PC4 Norm Weight
Account 0.5914 -0.1778 -0.2541 -0.7444 0.257119
Dtrans 0.4943 0.0278 0.8640 0.0912 0.426954
Deposit 0.3138 -0.9176 0.2201 0.1052 0.02504
Loan 0.5545 -0.3544 0.3754 -0.6531 0.285013
Eigenvalues 2.43134 0.870141 0.54103 0.157485

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 Digital Financial Inclusion and Implications
Yaqin, M., & Safuan, S.
for Developing Countries Economic Growth

From the results of the PCA estimation regarding the weighting scheme on the access
dimension, this study found that the highest weight was the indicator of the number of Bank
Branches. Tram et al. (2021) explained that bank branches would be the beginning of access
to financial services. More direct data is directed to the nearest bank branch office for the first
account creation or the introduction of public financial services. These results are supported
by a study from Bruhn & Love (2014) that opening new commercial banks encourages
increased access to credit for low-income individuals in Mexico. Then, digital financial services
infrastructure indicators such as the internet and mobile cellular are essential in increasing
access to financial services, with weights of 26% and 32%, respectively. This component
serves to provide adequate infrastructure for accessing digital financial services. PCA results
on the usage dimension also show that digital transaction indicators have the highest weight
in the use of financial services. The convenience and costs offered by digital transactions are
significant implications for using financing services provided by banks (Indrawati et al., 2020;
Rekha et al., 2022).
Then for the second stage of PCA, to construct financial inclusion from the dimensions
of access and use, like the first stage of PCA, before implementing the second stage of PCA,
the KMO test must be done. The results of the second stage of KMO are in Table 5.
Table 5: Kaiser–Meyer–Olkin Test in Second Stage PCA
Variable KMO
Access 0.5000
Usage 0.5000
Total 0.5000
The results of the KMO test in Table 5 show that the KMO test value is equal to 0.5 in
the sense that it is sufficient and the indicators used are correlated. KMO for the dimensions
of access and usage dimensions is 0.52. With these results, PCA analysis can be continued.
Table 6 presents the results of the second stage of PCA.
Table 6: Principal Component Analysis Estimation in Second Stage
Dimension PC1 PC2 Norm Weight
Access dimension 0.7071 0.7071 0.7071
Usage dimension 0.7071 -0.7071 0.2907
Eigenvalues 1.73549 0.264508

This study finds that access to financial services gives more significant weight than the
usage dimension regarding the weighting scheme. These results indicate that improvement
in access is an essential aspect of providing opportunities for the public to enjoy the financial
services provided.
Then, from PCA estimation stages 1 and 2, the digital financial inclusion index is shown
in Table 7 (Appendix). Following previous studies, this study’s ranking or category of digital
financial inclusion is divided into three categories: high, medium, and low. High, medium,
and low refer to countries in the 75th percentile or higher, the 25th to 75th percentile, and
below. Overall, the PCA estimation results show that the average level of DFI in developing
countries is in the middle category. In more detail from Table 7, it can be seen that in 2014
there were 13 countries with digital financial inclusion in the high category, 25 countries in the
middle category, and 13 countries in the low category. The country that has a high financial
inclusion index is Mongolia, followed by Thailand and Malaysia. Mongolia is taking advantage
of new technologies, such as mobile banking, which can provide opportunities to increase
penetration in rural areas (World Bank, 2012).

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 JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48

Meanwhile, the country with the lowest DFI index in the results of this study for 2017
is Madagascar, followed by Congo, Dem. Republic and Pakistan with indexes of 0.008 and
0.073, respectively. The three countries’ obstacles to financial inclusion are limited access,
such as the need for digital infrastructure, and physical services, such as access and ATMs.
According to this study, the financial inclusion index increased by 25% between 2014
and 2017. The component of access to financial institutions dominated the increase. The
number of ATMs has been the most significant increase over the last decade, especially in
developing countries. Moreover, an essential factor in DFI in the form of digital infrastructure,
such as mobile cellular, is increasing sharply in developing countries, and mobile phones have
played an essential role in accessing the internet, especially in countries with lower per capita
incomes (Khera et al., 2021; Liu et al., 2021; Sahay et al., 2020). The rapid development of
ownership of cellular telephones and the internet has increased access and use of financial
services, especially for transaction purposes. Data from the World Bank show that the use
of digital transactions increased by 12% from 2014 to 2017. The convenience and benefits
offered by digital financial services in conducting financial activities encourage an increase
in this component in developing countries (Shen et al., 2021; Wardhono et al., 2020; Yang &
Zhang, 2020). This condition is also evidenced by the results of the second phase of the PCA,
which shows that digital transactions are the primary indicator in encouraging the acceleration
of the use of financial services in developing countries.

Figure 1: Financial Inclusion Index in Developing Countries

Digital financial inclusion in regional divisions also increased between 2014 and 2017.
The highest increase in DFI was in the African region, which increased by 29% in the 2014
to 2017 period. The rapid increase in ownership of mobile phones and internet access has
encouraged the use of financial services in Africa. Between 2014 and 2017, sub-Saharan
African adults with mobile money accounts nearly doubled (12% to 21%). However, although
Africa experiences the highest development of financial inclusion, financial inclusion in
Africa has relatively lower financial inclusion than other regions such as Asia, Europe, and
the Americas. Girón et al. (2021) show that financial infrastructure, income inequality, and
financial literacy hinder financial inclusion in Africa. In a different direction, the European
region has the highest level of financial inclusion compared to other regions. Over the past
decade, Europe’s account ownership increased from 45% of the adult population in 2011 to
65% in 2017. The transformation of digital financial services has driven financial inclusion in
the European region in recent years (Khera et al., 2021). The ease and affordability of the costs
offered in the financial industry from the application of technology provide opportunities for
greater access for all circles of society in using financial services.

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 Digital Financial Inclusion and Implications
Yaqin, M., & Safuan, S.
for Developing Countries Economic Growth

Then for the robustness check for the strength of the financial inclusion index, this
study conducted a validity test based on the idea of Beck & Demirgüç-Kunt (2008) and Ahamed
& Mallick (2019). This study tested the correlation between financial inclusion in this study
and the FI index from Park & Mercado (2018). The results can be seen in Tables 7 and 8. The
results show that the DFI index of this study and the FI index of Park & Mercado (2018) (IFI)
are strongly correlated. These results indicate that the digital financial inclusion index in this
study has sufficient evidence to confirm that the FI index of this study is valid and relatively
strong compared to the measurement of financial inclusion conducted in previous studies.
Table 7: Correlation of Digital Financial Inclusion Index and IFI Park and Mercado (2018)
DFI IFI ParkMercado
DFI 1.0000
IFI ParkMercado 0.6976* 1.0000
Note: Significant *p<0.05

Table 8: Estimation Results of Research DFI and IFI from Park and Mercado (2018)
Variable Result
DFI 29.4127***
4.315412
CONT 0.8865453***
(2.943275)
Observation 51
R-Square 0.4867
Note: Significant ***p<0.01; **p<0.05; *p<0.10

Relationship between Digital Financial Inclusion and Economic Growth

This section relates to the relationship between DFI and economic growth estimation
results. Before doing the estimation, the model selection test was used to find out the best
model that was carried out in the study. Two tests are used, namely the Lagrange Multiplier
and Hausman tests.
Table 9: Model Selection Test
Lagrange Multiplier Test Hausman Test
Chibar2 33.69 Chi2 37.62
Prob > Chibar2 0.0000 Prob > Chi2 0.0000

The results of the Lagrange Multiplier test show that the random effect model was
chosen compared to the least squares (PLS) panel model. Then, for the Hausman test, it is
known that the pro>chi2 value is 0.0000 or below 0.05, which indicates that the model chosen
is the fixed effect model.
In this case, the estimation results of the fixed effect model are in Table 10, column
1. The test results using the fixed effect model show that DFI has a significant positive effect
on GDP at 1%, 5%, and 10%. The resulting coefficient is 0.63. This result means that when
there is an increase in DFI by 1%, it will increase GDP by 0.63%. The positive impact of DFIs
on GDP growth in the fixed effect model were also confirmed by the random effects model
and the PLS model, both of which found that DFI had a significant positive effect on GDP
with coefficients of 0.81 and 2.81, respectively. This condition means that this positive result
follows other models. This is following research conducted by Aminou et al. (2020), Khera

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 JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48

et al. (2021), Shen et al. (2021), and Rekha et al. (2022) state that an increase in DFI affects
increasing economic growth. Economic growth conditions are driven by consumption (Khera
et al., 2021; Wardhono et al., 2016).
Table 10: Estimation Results of Digital Financial Inclusion on Economic Growth
Variable Fixed Effect Model Random Effect Model PLS Model
DFI 0.6364461*** 0.8162988*** 2.8112623***
(0.0910985) (0.1081634) (0.2546697)
GE 0.0030217 0.0114543** 0.0113476*
(0.008095) (0.0088193) (0.010866)
FDI -0.0100245*** -0.0408183*** 0.0190295**
(0.026506) (0.0032386) (0.0120199)
POP -0.0183081 -0.0408183 *
-0.0497707
(0.0227218) (0.027095) (0.0606249)
TRADE 0.0011248 0.0015152 -0.0040226
(0.0997842) (0.000917) (0.0017624)
CONS 7.600157 67.4110781 6.750337
(0.1331351) (0.172561) (0.2568245)
Observation 102 102 102
R-Square 0.5786 0.5771 0.6778
Note: Significant: ***p<0.01; **p<0.05; *p<0.10

Sethi & Acharya (2018) also show that financial inclusion affects economic growth in
two ways. The first is increasing access to credit which encourages the creation of a production
process that ultimately leads to an increase in output and economic growth. The second is
great access to deposit or insurance products. This condition encourages increased funds in
the money market to efficiently use resources by allocating or investing in productive sources
(Wardhono et al., 2019). This results in more output, which leads to increased economic
growth.
Moreover, Yang & Zhang (2020) explained that digital financial inclusion has several
benefits, namely increasing the accessibility of financial services, increasing the scope of
financial services, diversifying financial service products suitable for the community, and
efficient use of financial services. The benefits received from financial inclusion are increased
access to affordable credit and increased access to other financial services products such as
deposits and insurance (Safuan et al., 2021; Sethi & Acharya, 2018). Excellent access to credit,
especially for previously unbanked people, will allow them to take advantage of the ease
of financing for productive use. Organized production activities feel these benefits, which
ultimately create more output (Sethi & Acharya, 2018). In other words, access to affordable
credit can encourage an increase in output production and will impact increasing income. Then
the existence of public savings encourages long-term investment, which can produce more
output and employment. This condition will create an improvement in income distribution.
It is also supported by the study of Kendall et al. (2010), which found that greater access
supports economic efficiency, leading to increased economic growth.
Robustness Test Relationship of DFI and Economic Growth
Robustness tests of the estimation results of the relationship between DFI and
economic growth, in this case, the coefficient sensitivity and consistency tests of the results,
were carried out by eliminating or breaking the control variables. As explained earlier, four

39
 Digital Financial Inclusion and Implications
Yaqin, M., & Safuan, S.
for Developing Countries Economic Growth

control variables are included in the model built in Chapter 3 to test digital financial inclusion
and economic growth. In this case, the estimate will be tested when the control variable is not
included, using one control variable, two control variables, and three control variables, and
all control variables are included. In this case, the consistency of the results is achieved when
the direction and coefficient values ​​do not change much. The results of the robustness test
by playing the control variables in the estimation results of the relationship between DFI and
economic growth can be seen in Table 11.
Table 11: Robustness Test Estimation Results of Digital Financial Inclusion on Economic
Growth
Model FE FE Model FE Model FE Model FE Model with
Variable without control with 1 control with 2 control with 3 control full control
variable variable variables variables variable
DFI 0.586796*** 0.585008*** 0.613089*** 0.603572*** 0.6364461***
(0.0961499) (0.0969861) (0.0877744) (0.0891542) (0.0910985)
GE 0.0040297 0.0035456 0. 004136 0.0030217
(0.0086264) (0.0080685) (0.0081477) (0.008095)
FDI -0.08935*** -0.00889*** -0.010024***
(0.0025451) (0.0025582) (0.026506)
POP -0.0168052 -0.0183081
(0.0229515) (0.0227218)
TRADE 0.0011248
(0.0997842)
CONS 7.677189 7.733542 7.652186 7.675598 7.600157
(0. 0464037) (0. 1293844) (0. 1188886) (0.123672) (0.1331351)
Observation 102 102 102 102 102
R-Square 0.6549 0.6304 0.6039 0.6070 0.05786
Note: Significant: ***p<0.01; **p<0.05; *p<0.10

The robustness test calculation of the association between digital financial inclusion
and GDP growth is shown in Table 12. In general, the coefficient values ​​for all models used
are known, but the coefficient values ​​for digital financial inclusion are not much different. The
range of coefficient values ​​for digital financial inclusion is 0.58 for the model without control
variables and 0.63 for all control variables. Overall, from all models, the results show that
financial inclusion significantly affects economic growth. These results indicate that the model
built is consistent with the results offered. Financial inclusion, in particular, has a considerable
positive impact on economic growth.
Conclusion
This study develops the development of a digital financial inclusion index by including
the development of digital technology in the financial industry. Developing a digital financial
inclusion index takes advantage of the latest World Bank and IMF FAS data development.
Moreover, after getting the results of the digital financial inclusion index built into this study,
this paper provides empirical evidence of the impact of the inclusion of digital finance on
developing-country economic growth.
According to the test results in this study, the overall digital financial inclusion index
in developing countries is in the middle category, with the most significant increase in the
African region. A comparison with other studies shows that the index of this study strengthens

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 JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48

the previous study. Moreover, the results also show that the accessibility dimension is a
significant component in determining digital financial inclusion with a determining indicator,
namely the number of bank branches. Then, in the dimension of use, the results show that
digital transactions are the component with the highest weight in determining the use of
financial services. For the results of testing the effect of digital financial inclusion on economic
growth in developing countries, the inclusion of digital finance has a strong positive effect
on increased GDP. It strengthens the evidence and follows financial inclusion objectives in
developing countries. Namely, one of the goals of developing financial inclusion is encouraging
economic growth.
Based on the results of this study, several policies are embodied from this study’s
results; first, related authorities such as the government and central banks need to increase
digital financial inclusion as a strategy to increase economic growth. Increasing digital financial
inclusion in terms of access can be encouraged by improving the quantity and quality of public
and digital financial service infrastructure. Meanwhile, in terms of usage, this can be done
through diversification and innovation in providing digital services that suit the community’s
needs. The second is the need to consider issues that impede the development of financial
inclusion. The World Bank explained that the main regulatory issues raised regarding digital
financial inclusion were consumer protection, payment system regulation, and financial
competition. The relevant authorities, therefore, need to build trust in digital finance through
well-developed electronic payment systems, solid and transparent regulations, and consumer
protection. Third, the collaboration between various national and international stakeholders
is essential in developing digital financial inclusion.
One of the limitations of this study is the limited measurement of financial inclusion
using the PCA method. We can also consider other methods of building a digital financial
inclusion index in the future. Second, case study research only focuses on developing countries.
In the future, we can consider a comparison with developed countries. Third, the period used
in building digital financial inclusion is only two time periods. This period is partly due to
limited data availability. Using a more extended time will provide many perspectives from the
results obtained.
Declaration
In this section, I declare that this research: (1) does not conflict with anyone’s interests
(2) Availability of data and materials, (3) there are the author’s contributions, (4) there is a
source of funding and (5) and acknowledgments.
Conflict of Interest
The authors declare that there is no significant competing financial, professional, or
personal interests that might have affected the performance.
Availability of Data and Materials
The data are freely available on World Development Indicator, published by World
Bank on given URL ID: [Link]
Authors’ Contribution
Sugiharso Safuan and Misbahol Yaqin conceptualized the study; Misbahol Yaqin
created the methodology; Sugiharso Safuan and Misbahol Yaqin wrote, reviewed, and edited
the manuscript; Sugiharso Safuan and Misbahol Yaqin wrote the original draft.

41
 Digital Financial Inclusion and Implications
Yaqin, M., & Safuan, S.
for Developing Countries Economic Growth

Funding Source
This research received no external funding.
Acknowledgment
We would like to thank the University of Indonesia for their technical support and all
the contributors who helped in this study.
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Appendix

Table 12: Digital Financial Inclusion Index Results

2014 2017
Yaqin, M., & Safuan, S.

Negara DFI Ranking Category Country DFI Ranking Category

Armenia 0.511 18 Medium Armenia 0.702 13 High
Bangladesh 0.218 40 Low Bangladesh 0.359 36 Medium
Benin 0.192 42 Low Benin 0.307 41 Low
Bolivia 0.445 26 Medium Bolivia 0.572 21 Medium
Botswana 0.552 16 Medium Botswana 0.546 24 Medium
Brazil 0.838 4 High Brazil 0.837 8 High
Cambodia 0.273 35 Medium Cambodia 0.333 38 Medium
Cameroon 0.105 48 Low Cameroon 0.226 46 Low
Chile 0.846 3 High Chile 0.942 4 High
for Developing Countries Economic Growth
Digital Financial Inclusion and Implications

China 0.612 12 High China 0.764 10 High

Colombia 0.564 15 Medium Colombia 0.651 17 Medium
Congo, Dem. Rep. 0.041 50 Low Congo, Dem. Rep. 0.073 50 Low
Congo, Rep. 0.152 45 Low Congo, Rep. 0.201 47 Low
Dominican Republic 0.434 27 Medium Dominican Republic 0.561 23 Medium
Egypt, Arab Rep. 0.244 37 Medium Egypt, Arab Rep. 0.389 33 Medium
El Salvador 0.471 21 Medium El Salvador 0.495 29 Medium
Georgia 0.645 10 High Georgia 0.865 7 High
Ghana 0.305 34 Medium Ghana 0.474 30 Medium
Guatemala 0.517 17 Medium Guatemala 0.584 20 Medium
Honduras 0.375 29 Medium Honduras 0.468 31 Medium
India 0.373 30 Medium India 0.533 25 Medium
Indonesia 0.452 25 Medium Indonesia 0.646 18 Medium
Jordan 0.431 28 Medium Jordan 0.495 28 Medium
 2014 2017
Negara DFI Ranking Category Country DFI Ranking Category
Kenya 0.455 24 Medium Kenya 0.529 26 Medium
Madagascar 0.002 51 Low Madagascar 0.008 51 Low
Malaysia 0.935 1 High Malaysia 0.967 3 High
Mauritania 0.309 33 Medium Mauritania 0.370 35 Medium
Mexico 0.463 22 Medium Mexico 0.524 27 Medium
Moldova 0.600 13 High Moldova 0.673 15 Medium
Mongolia 0.850 2 High Mongolia 1.000 1 High
Myanmar 0.077 49 Low Myanmar 0.197 48 Low
Namibia 0.564 14 Medium Namibia 0.760 11 High
Nicaragua 0.255 36 Medium Nicaragua 0.378 34 Medium
Nigeria 0.330 32 Medium Nigeria 0.326 40 Low
Pakistan 0.117 47 Low Pakistan 0.184 49 Low
Panama 0.750 9 High Panama 0.740 12 High
Peru 0.458 23 Medium Peru 0.663 16 Medium
Philippines 0.350 31 Medium Philippines 0.410 32 Medium
Romania 0.641 11 High Romania 0.685 14 Medium
Rwanda 0.221 39 Low Rwanda 0.281 42 Low
Senegal 0.199 41 Low Senegal 0.332 39 Low
South Africa 0.795 7 High South Africa 0.830 9 High
Thailand 0.796 6 High Thailand 0.975 2 High
Togo 0.118 46 Low Togo 0.250 44 Low
Tunisia 0.483 20 Medium Tunisia 0.585 19 Medium
Turkey 0.766 8 High Turkey 0.899 5 High
Uganda 0.165 44 Low Uganda 0.244 45 Low
Ukraine 0.811 5 High Ukraine 0.868 6 High
Vietnam 0.506 19 Medium Vietnam 0.564 22 Medium
Zambia 0.177 43 Low Zambia 0.260 43 Low

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JDE (Journal of Developing Economies) Vol. 8 No. 1 (2023): 29-48
 48
2014 2017

View publication stats

Negara DFI Ranking Category Country DFI Ranking Category
Zimbabwe 0.231 38 Low Zimbabwe 0.352 37 Medium
Developing Countries 0.432 Medium Developing Countries 0.527 Medium
Yaqin, M., & Safuan, S.

Note: The category of digital financial inclusion level (high, medium, and low) for each country follows the study of Sarma (2012) and Khera et al. (2021) assigned to the 75th percentile or higher
(high category), 25th to 75th percentile (medium category) and below 25th (low category) of the index.
for Developing Countries Economic Growth
Digital Financial Inclusion and Implications