Financial Innovation and Financial Inclusion Nexus in South Asian Countries: Evidence from Symmetric and Asymmetric Panel Investigation

Abstract

This paper examines the nexus between financial inclusion and financial innovation while incorporating financial development and remittance inflows in the case of six South Asian countries—Bangladesh, India, Pakistan, Nepal, Bhutan, and Srilanka—by employing the panel autoregressive distributed lagged model under a linear and nonlinear framework using monthly data over the period 1990M1–2018M12. Further, a Granger-causality test with System GMM specification was performed for assessing directional causality. The study findings from Panel ARDL confirmed the positive association between financial innovation and financial inclusion, which was observed both in the long run and short-run. Considering the nonlinearity in the estimation, the standard Wald test confirms the existence of an asymmetric relationship both in the short-run and in long run horizon regarding causality test results. The study findings support the feedback hypothesis that the presence of bidirectional causality between the financial innovation and financial inclusion is both in the short-run and long run. Since the study findings established a critical relationship between financial innovation and financial inclusion, therefore effective policy guidelines are suggested so that the contribution from financial inclusion and financial innovation can assist in developing a vibrant financial sector.

Economic Policy Uncertainty and Financial Innovation: Is There Any Affiliation?

“…In this vein, a growing number of studies are available in the empirical literature. For instance, in the study by Qamruzzaman and Wei ( 2019 ), they advocated that the process of financial inclusion has been augmented by the diffusion of innovative financial products and services in the economy. Furthermore, Arslanian and Fischer ( 2019 ) suggested that financial innovation, particularly technological advancement in providing financial services, results in easy access to the unbanked population in the formal financial system.…”

“…The empirical literature produces two lines of thoughts regarding the role of financial innovation in the economy. A group of researchers exposed the positive impact of financial innovation on economic growth (Michalopoulos et al, 2009 ; Ajide, 2015 ; Laeven et al, 2015 ; Bara and Mudxingiri, 2016 ; Bara et al, 2016 ; Qamruzzaman and Jianguo, 2017 ; Qamruzzaman and Wei, 2019 ), financial sector development, (Malak, 2013 ; Otoo, 2013 ; Domehe et al, 2014 ), foreign direct investment (Qamruzzaman and Jianguo, 2018a ), and financial inclusion (Qamruzzaman and Wei, 2019 ). The second vein of thought in the empirical literature, i.e., harmful or advise effects based on firm-specific and country-specific investigation (for instance, Smith et al, 1990 ) pointed to increased volatility.…”

Economic Policy Uncertainty and Financial Innovation: Is There Any Affiliation?

“…Financial innovation in the empirical literature is one of the discussant facts since Schumpeter [3]. Over the past few decades, researchers and academicians invest considerable efforts in gauging the effects of financial innovation and produce substantial evidence such as financial innovation accelerate economic growth (Bara,Mugano [4], Jianguo and Qamruzzaman [5], Bara and Mudxingiri [6], Laeven, Levine [7], Laeven, Levine [8], Michalopoulos, Laeven [9], Qamruzzaman and Wei [10], Ajide [11], financial sector development [12][13][14], foreign direct investment [15]; financial inclusion [10]. Another line of findings are also available in the empirical literature, i.e., harmful or advise effects base on firm-specific and countryspecific investigation see, for instance, Smith, Smithson [16] point to increasing volatility; however, the positive impact from financial innovation is more prominent than a negative one.…”

“…In this vein, a growing number of studies are found in the empirical literature. For instance, In the study of Qamruzzaman and Wei [10], they advocated that the process of financial inclusion has been augmented by the diffusion of innovative financial products and services in the economy. In the study of Arslanian and Fischer [52], they suggested that financial innovation, particularly technological advancement in providing financial services, results in easy access to the unbanked population's formal financial system.…”

“…Once the long-run association documented, we move to assess both long-run and short-run magnitudes running from economic policy uncertainty to financial innovation Table IV of Panel B reports long-run coefficients and found negatively associate with financial innovation. Results display in Col [1] for Brazil, a coefficient of -0.029, [4] for Russia, a coefficient of -0.081, [7] for India, a coefficient of -0.073, and [10] for China, a coefficient of -0.074, where financial innovation measured by M2/M1 in the empirical equation. Furthermore, financial innovation measured N3/M1 by results exhibits in Col [2], a coefficient of -0.026 for Brazil, Col [5] a coefficient of -0.028 for Russia, col [8] a coefficient of -0.064 for India, and col [11] a coefficient of -0.053 for china.…”