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Geopolitical shocks, capital outflows, financial inclusion and digital financial inclusion

Ozili, Peterson K (2025): Geopolitical shocks, capital outflows, financial inclusion and digital financial inclusion. Forthcoming in:

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Abstract

This study examines the effect of capital outflows, induced by geopolitical shocks, on financial inclusion and digital financial inclusion in emerging markets and developing economies. Several measures of financial inclusion and digital financial inclusion were analysed for 17 emerging markets and developing economies from 1999 to 2023. The data were estimated using the median quantile regression and generalized linear model regression methods. The findings reveal that capital outflows, induced by geopolitical shocks, have a negative effect on financial inclusion and digital financial inclusion. Greater capital outflows, induced by geopolitical shock, decrease the level of financial inclusion through a contraction in the number of commercial bank branches in emerging markets and developing economies. Also, greater capital outflows, induced by geopolitical shock, decrease the level of digital financial inclusion through a decrease in the number of people using the internet to access commercial bank branch services and automated teller machine services. Political stability, GDP growth, population growth, unemployment, tax revenue and regulatory quality are significant determinants of financial inclusion and digital financial inclusion. The social implication is that geopolitical shocks and capital outflows adversely affect society by limiting access to essential financial services. The managerial implication is that financial managers will constantly need to anticipate geopolitical risk, its effect on financial services and develop safeguards to cushion its effect on financial service providers and customers.

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