Association for Public Policy Analysis & Management

Digitalization is viewed as a promising solution to address global financial inclusion – a core topic of economic development and poverty reduction. While traditional financial institutions are not fully capable of providing financial services to low-income populations, digital payment can potentially leverage alternative data for credit scoring, reduce the need for physical infrastructure, and provide affordable transaction services. ICT development, represented by access to mobile phone and internet, provides basis for applying digital payment and thus determines the level of financial inclusion. This paper analyzes to what extent individual access to ICT infrastructure impacts the level of financial inclusion. Using panel data of 189 countries and 12 years from 2005 to 2017, this paper applies fixed-effects regression to test the role of mobile subscription and internet access in predicting 1) deposit accounts, 2) loan accounts, 3) outstanding deposits and 4) outstanding loans at commercial banks, along with control factors of bank overhead cost, income, education, urban population, remittance, inflation, government effectiveness, political stability and the rule of law. As a result, the paper finds strong positive effects of ICT development on financial inclusion: higher levels of mobile penetration and internet coverage are associated with higher number of bank accounts, as well as more deposits and loans taken from commercial banks. A close focus on developing countries also yields similar results, despite a higher weight on inflation control and regulation to stimulate the use of financial services. The finding supports that countries should prioritize ICT infrastructure for financial inclusion, in order to improve economic wellbeing of ordinary people. The paper also emphasizes the importance of stabling and government regulatory quality along with investments to extend financial services.