Financial inclusion indicators as determinants of economic growth in selected LMI African countries

In the landscape of economic development, a common belief holds that simply building more banks and opening more accounts will naturally lift a nation's wealth. This idea rests on the concept of financial inclusion, which is the practice of ensuring that ordinary people and small businesses have access to useful and affordable financial products like savings accounts, loans, and insurance. The logic is straightforward: when people can save money safely in a bank, those funds can be lent out to others to build factories, buy equipment, or start farms, creating a cycle of investment that grows the economy. For decades, economists have studied whether the physical presence of bank branches and the number of people holding accounts actually drive this growth, particularly in nations where money is scarce and opportunities are limited.

A team of researchers set out to test this assumption in ten lower-middle-income African countries, examining data from 2004 to 2023. They focused on two specific measures of financial inclusion: the number of commercial bank branches available for every 100,000 adults, and the number of deposit accounts held at commercial banks for every 1,000 adults. Their goal was to see if these numbers moved in step with the growth of the real gross domestic product, which is the total value of goods and services produced in a country, adjusted for inflation. The researchers expected that more branches and more accounts would lead to a stronger economy, but their analysis of the data revealed a surprising and counterintuitive reality.

The study, conducted by scholars from Nile University and Prime University, analyzed historical records from countries including Nigeria, Egypt, Tunisia, and Tanzania, among others. They specifically excluded nations such as Algeria, the Republic of the Congo, Côte d'Ivoire, Djibouti, Ghana, Kenya, Mauritania, Morocco, Sao Tomé and Príncipe, Senegal, and Zimbabwe due to incomplete data. They used statistical tools to look for patterns between the expansion of banking infrastructure and the actual performance of the economy. Instead of finding the expected positive link, the data showed a clear negative relationship. The researchers found that in these specific countries, an increase in the number of bank branches was associated with a decrease in economic growth. Similarly, a rise in the number of deposit accounts was also linked to a drop in economic growth. The statistical evidence was strong enough to rule out the possibility that these results were just random chance; the numbers indicated that the more the banking sector expanded in terms of physical branches and account counts, the less the economy grew during the period studied.

This finding challenges the simple notion that "more banking" automatically equals "more growth." The researchers suggest that the problem lies not in the idea of financial inclusion itself, but in how it is currently implemented in these regions. They argue that simply building more physical bank branches does not guarantee that money is being used for productive purposes. In many cases, these branches are concentrated in urban areas where banking services are already common, while rural areas remain underserved. Furthermore, the mere existence of a branch or an account does not mean that the money sitting in those accounts is being lent out to build businesses or improve farms. Instead, funds may be sitting idle, or they might be lent for consumption or government spending rather than for investments that create jobs and increase production.

The researchers also point out that the banking sector in these countries may be inefficient. If a bank opens a new branch but lacks the ability to manage risk or allocate credit wisely, that expansion can actually drain resources without generating economic value. The study highlights that the cost of maintaining a large network of physical branches can be high, and if those branches are not serving the people who need them most, the investment in them can become a burden rather than a benefit. The data suggests that the traditional model of expanding physical banking infrastructure is not working as a driver of growth in these specific economies.

The study concludes that for financial inclusion to truly help an economy grow, the focus must shift from simply counting branches and accounts to ensuring that the financial system is efficient and that funds are actually reaching productive sectors like agriculture and manufacturing. The researchers recommend that policymakers and banks look beyond physical expansion and consider digital solutions, such as mobile banking and agent networks, which can reach remote areas at a lower cost. They also emphasize the need for better financial education so that people understand how to use these services to save and invest effectively. Without these changes, the researchers warn that simply adding more branches or opening more accounts may continue to fail to deliver the economic growth that these nations need.

The findings offer a sobering but necessary correction to the way development is often approached. They suggest that the quantity of financial services is less important than the quality and direction of those services. If the money in the bank is not flowing into projects that create real value, then the bank itself is not helping the economy grow. For the countries studied, the path forward involves fixing the inefficiencies in how money moves through the system, rather than just building more places to store it. This insight provides a clear direction for future efforts to improve economic conditions in lower-middle-income African nations, moving the conversation from how many banks exist to how well those banks actually serve the economy.