Financial inclusion and business cycles

Ozili, Peterson K (2020): Financial inclusion and business cycles. Forthcoming in: Journal of Financial Economic Policy

Abstract

The current debate on financial inclusion pays little attention to whether financial inclusion is pro-cyclical with the fluctuating business cycle. This article investigates the relationship between financial inclusion and the business cycle. The findings reveal that the level of savings and the number of active formal accounts are pro-cyclical with fluctuations in the business cycle. Also, the level of savings by adults particularly for women and poor people decreases during recessionary periods while the number of active formal accounts decline for the adult population especially for women during recessionary periods. The findings also reveal that not all indicators of financial inclusion are pro-cyclical with fluctuating business cycles. The implication of the findings is that poor people and women will exit the formal financial sector during a recession, as banks become unwilling to lend money to poor individuals and households during bad times, and this will lead to financial exclusion and vice versa. Policy makers seeking to increase the level of financial inclusion should focus on the timing of financial inclusion policies along the business cycle as the findings suggest that it might be more difficult to achieve financial inclusion objectives during recessions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial inclusion, pro-cyclicality, business cycle, financial crisis, access to finance, economic cycles, GDP, formal account ownership, borrowing, savings
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I31 - General Welfare, Well-Being

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