Fintech and Inclusive Growth: Evidence from 25 Asian Developing Countries

ADBIWorkingPaperSeries FINTECHANDINCLUSIVEGROWTH:EVIDENCEFROM25ASIANDEVELOPINGCOUNTRIES Md.Al-AminParvez,EvantaHashemKatha,MashruraKabirShaeba,andMd.SajjadHossain No.1385 May2023 AsianDevelopmentBankInstitute Md.Al-AminParvez,EvantaHashemKatha,MashruraKabirShaeba,andMd.SajjadHossainareassistantdirectorsofresearchattheResearchDepartmentofBangladeshBank. TheviewsexpressedinthispaperaretheviewsoftheauthoranddonotnecessarilyreflecttheviewsorpoliciesofADBI,ADB,itsBoardofDirectors,orthegovernmentstheyrepresent.ADBIdoesnotguaranteetheaccuracyofthedataincludedinthispaperandacceptsnoresponsibilityforanyconsequencesoftheiruse.TerminologyusedmaynotnecessarilybeconsistentwithADBofficialterms. Discussionpapersaresubjecttoformalrevisionandcorrectionbeforetheyarefinalizedandconsideredpublished. TheWorkingPaperseriesisacontinuationoftheformerlynamedDiscussionPaperseries;thenumberingofthepaperscontinuedwithoutinterruptionorchange.ADBI’sworkingpapersreflectinitialideasonatopicandarepostedonlinefordiscussion.Someworkingpapersmaydevelopintootherformsofpublication. Suggestedcitation: Parvez,Md.A.-A.,E.H.Katha,M.K.Shaeba,andMd.S.Hossain.2023.FintechandInclusiveGrowth:Evidencefrom25AsianDevelopingCountries.ADBIWorkingPaper1385.Tokyo:AsianDevelopmentBankInstitute.Available:https://doi.org/10.56506/QMHR3332 Pleasecontacttheauthorsforinformationaboutthispaper.Email:alamin.parvez@bb.org.bd,alaminparvez.90@gmail.com AsianDevelopmentBankInstituteKasumigasekiBuilding,8thFloor3-2-5Kasumigaseki,Chiyoda-ku Tokyo100-6008,Japan Tel:+81-3-3593-5500 Fax:+81-3-3593-5571 URL:www.adbi.orgE-mail:info@adbi.org ©2023AsianDevelopmentBankInstitute Abstract TheprimaryobjectiveofthisstudyistounveiltheimpactofFinTechthroughfinancialdevelopment,financialinclusion,andinstitutionalqualityontheinclusivegrowthof25developingcountriesinAsia.Toservethispurpose,theHumanDevelopmentIndex(HDI),thedependentvariable,hasbeentakenastheproxyforinclusivegrowthalongwithasetofindependentvariablesinawell-balancedpaneldataset,whichisthenanalyzedtoseetheimpactofchanginglevelsofindependentvariablesonhumandevelopmentfortheperiod2014–2021.TheresultsshowthatincreasingthelevelofFinTechalongwiththeFindex,financialinclusion,andinstitutionalqualitymayincreasehumandevelopment. Keywords:FinTech,financialinclusion,inequality,paneldatamodel,Hausmantest JELClassification:C23,D31,D63,F02 Contents 1.INTRODUCTION1 2.RELATEDLITERATUREREVIEW3 3.DATAANDECONOMETRICSTRATEGY6 3.1Model6 3.2Data7 3.3EmpiricalTechnique8 4.ECONOMETRICRESULTS9 4.1ResultsandDiscussion9 5.CONCLUSIONANDPOLICYRECOMMENDATION11 REFERENCES13 APPENDIXA:LISTOFCOUNTRIES16 1.INTRODUCTION TheconceptofFinTech,whichreferstotheuseoftechnologytodeliverfinancialservices,isanimportantcomponentoffinancialinclusion.FinTechhasthepotentialtorevolutionizethewayfinancialservicesaredelivered,makingthemmoreaccessibleandaffordableforunderservedpopulations.Withtheriseofmobilebanking,forexample,peoplecannowaccessfinancialservicesusingjusttheirmobilephones,withouttheneedforaphysicalbankbranch.Thishasthepotentialtobringfinancialservicestoremoteareasandunderservedpopulations.Afundamentalcomponentofsocialinclusionisfinancialinclusion,whichisparticularlyeffectiveinensuringinclusivegrowthandconsequentlyreducingincomeinequalityandpovertybyincorporatingunderprivilegedgroupsofpeopleintoformalbankingchannels.Financialinclusionprogramsrefertothoseprogramsthatmakeformalfinancialservicesinexpensiveandaccessibletoallsectorsofthepopulation,particularlyforlow-incomeindividuals.Byprovidingthe"newlybanked"withaneasyaccesstoauthorizedfinancialservicesthataregovernedbyrules,financialinclusionispromoted.Financialexclusionmainlyrepresentspoordemographicsegments,andvulnerablegroupsincludingruralresidents,women,andfamilieswithlowincomes.Itwillensuresharedprosperityandinclusiveeconomicgrowthifwecanbringfinanciallyexcludedpeopleintobasicfinancialservices,i.e.,saving,borrowing,insurance,payments,etc. FinTechdiffersfromtraditionalfinancebyutilizingtechnologytoprovidefinancialservices,operatingonaP2Pbasistoreducetransactioncosts,andpotentiallydisruptingtheexistingfinancialindustry.WhileFinTechcanoffersignificantbenefits,suchasincreasedaccesstofinancialservicesandlowercosts,therearealsopotentialrisks,suchasincreasedvulnerabilitytocyberattacksandlessregulatoryoversight.Policymakersmustcarefullyconsidertheserisksandbenefitsandensureappropriateregulationsareinplacetoprotectconsumersandensurefinancialstability. Byenablingeconomicagentstoparticipateinlong-termparticipatoryinvestmentactivities,accesstofinancingpromotesinclusivegrowth.Itmakesiteasiertoallocateresourcesproductively,whichlowersthecostofcapital.Italsohelpsdealwithunforeseenshort-termshocks,considerablyimprovesday-to-dayfinancialmanagement,andeliminatestheuseoftypicallyexploitativeinformalloansources(Demirgüç-Kuntetal.2015,2018).Indevelopingeconomies,71%ofadultsnowhaveaformalfinancialaccount,upfrom42%adecadeearlier,accordingtothemostrecentdatafromtheGlobalFindexDatabase.Additionally,Demirgüç-Kuntetal.(2022)foundthatt