The Causal Nexus Between Digital Financial Inclusion and Economic Growth in Sub-Saharan Africa

Abstract

This analysis examines the causal relationship between digital financial inclusion and economic performance in Sub-Saharan Africa, a region experiencing significant financial access constraints. The theoretical framework suggests that digital financial services lower information barriers and transaction expenses, facilitating improved capital distribution and business development. The study develops a new composite index measuring digital financial inclusion through principal component analysis, combining multiple indicators across access, usage, and quality dimensions. To test the claim on a panel data consisting of 35 SSA countries spanning from 2004 to 2022, and solving the endogeneity problem arising from reverse causality and unobserved heterogeneity, a two-step system generalized method of moments (GMM) estimator is adopted. Our results provide robust evidence for a positive causal relationship. We find that a one standard deviation increment in the DFII leads to a statistically significant increase of 0.154 percentage points in annual GDP per capita growth. The methodological approach used in this analysis—specifically, the development of a comprehensive, multi-dimensional index alongside the deployment of a dynamic panel estimator to mitigate the risks associated with endogeneity—establishes a robust foundation for causal inference. This approach significantly elevates the scientific credibility of the findings, setting them apart from prior research that was largely constrained to mere correlational analysis. Furthermore, the stability of these conclusions is definitively confirmed by their successful replication across diverse model specifications and their satisfactory performance on all requisite post-estimation diagnostic criteria. Consequently, the evidence presented confirms that Digital Financial Inclusion (DFI) functions as a fundamental driver of economic expansion.