Exchange rate and financial inclusion

Ozili, Peterson K (2025): Exchange rate and financial inclusion. Forthcoming in:

Abstract

The relationship between financial inclusion and exchange rate has not received any attention in the literature. This study investigates the effect of the official exchange rate on the level of financial inclusion. A sample of 17 countries were analysed from 2012 to 2020. Four financial inclusion indicators were used in the analysis: the number of ATMs per 100,000 adults variable, the number of bank accounts (or depositors) per 1,000 adults variable, the number of commercial bank branches per 100,000 adults variable, and a financial inclusion index. The correlation result shows that financial inclusion and exchange rate are negatively correlated while the regression result shows that a weakening official exchange rate or currency depreciation has a significant positive impact on financial inclusion through increase in the number of bank depositors (or bank accounts) and increase in the number of commercial bank branches. The findings support the argument that currency depreciation will lead people to take more loans which will increase bank profitability and encourage banks to expand to new locations to acquire new depositors, thereby increasing financial inclusion. The implication of the study is that currency depreciation is beneficial effect for financial inclusion. It is recommended that policymakers should determine the right level of currency depreciation (or devaluation) that is needed to support national financial inclusion efforts and they should manage the exchange rate around that level.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial inclusion, exchange rate, bank branch, depositors, depreciation, devaluation
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations

References

Agarwal, I. (2018, June). Banks' Foreign Currency Exposure and the Real Effects of Exchange Rate Shocks. In Paris December 2018 Finance Meeting EUROFIDAI-AFFI.

Bahmani-Oskooee, M., & Hajilee, M. (2013). Exchange rate volatility and its impact on domestic investment. Research in Economics, 67(1), 1-12.

Beck, T., Bednarek, P., te Kaat, D., & von Westernhagen, N. (2022). Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets. Available at SSRN 4282877.

Bekele, W. D. (2023). Determinants of financial inclusion: A comparative study of Kenya and Ethiopia. Journal of African Business, 24(2), 301-319.

Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic modelling, 31, 672-683.

Ediagbonya, V., & Tioluwani, C. (2023). The role of fintech in driving financial inclusion in developing and emerging markets: issues, challenges and prospects. Technological Sustainability, 2(1), 100-119.

Ehrmann, M., Fratzscher, M., & Rigobon, R. (2011). Stocks, bonds, money markets and exchange rates: measuring international financial transmission. Journal of Applied Econometrics, 26(6), 948-974.

Hajilee, M., & Al Nasser, O. M. (2014). Exchange rate volatility and stock market development in emerging economies. Journal of Post Keynesian Economics, 37(1), 163-180.

Khan, M. K. (2019). Impact of exchange rate on stock returns in Shenzhen stock exchange: Analysis through ARDL approach. International Journal of Economics and Management, 1(2), 15-26.

Kouladoum, J. C., Wirajing, M. A. K., & Nchofoung, T. N. (2022). Digital technologies and financial inclusion in Sub-Saharan Africa. Telecommunications Policy, 46(9), 102387.

Lin, C. H. (2012). The comovement between exchange rates and stock prices in the Asian emerging markets. International Review of Economics & Finance, 22(1), 161-172.

Ozili, P. K. (2021). Financial inclusion research around the world: A review. Forum for Social Economics, 50(4), 457-479.

Ozili, P. K. (2023a). Impact of Monetary Policy on Financial Inclusion in Emerging Markets. Journal of Risk and Financial Management, 16(7), 303.

Ozili, P. K. (2023b). Corporate governance and financial inclusion. Journal of Money and Business, 3(1), 89-107.

Ozili, P. K., Lay, S. H., & Syed, A. A. (2023). Impact of financial inclusion on economic growth in secular and religious countries. Journal of Financial Regulation and Compliance, 31(4), 420-444.