Research Papers

Financial Inclusion Research Paper

Introduction. The concept of financial inclusion is still new and is characterized with vast gaps in developing countries. Financial inclusion for central banks in paramount, firstly, because it has long-term effects on economic growth and it plays a significant role in in reducing poverty and facilitating the environment of macroeconomic (Mbutor and Uba 318). Secondly, financial inclusion ignites behavioural changes in consumers and banks and, hence, achieves monetary, financial stability, and policy areas involved in central banking. Financial inclusion can lead to effective interest rates, price stability increase in the depositors’ base, and changes in borrowers and savers composition, hence achieving overall financial stability.

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Increase in financial inclusion relates with monetary policy firstly by encouraging consumers to reduce consumption, their choice of basic monetary policy such as on which price index to target may be affected resulting in increased inflation. The consequence of this is the increase of interest rates to regulate the inflation levels. Secondly, it is by encouraging consumers to deposit their savings in banks which may have effect on the intermediate policy targets role and the operations of the monetary policy.

Theoretical Literature. Over time, researchers have created diverse models explaining the impact of financial exclusion on monetary policy. Some authors incorporate the consumer rules in financial exclusion theoretical frameworks to argue that people do not borrow or save but they rather use the disposable income for consumption. Hence, the demand is based on the actual wage and the interest rates does not affect the decision concerning intertemporal consumption and the extent with economic financial inclusion affects monetary policy transmission mechanisms.

Another framework involves rules on a rigid pricing model where Taylor-type interest rates are used to find equilibrium and guarantee economic stability. Hence, nominal interest rates should rise based on inflation and stability levels. Lack of smooth consumption can increase the efficacy of monetary policy according to Gali et al.’s framework (754). In this model, an increase in in interest rate reduces consumption of the financially included consumers and the consumption demand and real wages of the excluded households. Hence, the efficacy of monetary policy rises with the increase of credit share of constrained consumers.

Under the inverted Taylor principle, equilibrium monetary policy is passive and, hence, the nominal interest rate has a lower rise as compared to the inflation in a scenario where a majority of the population cannot stabilize the consumption. Ascari et al. were of different view that limited asset market does not change the fundamentals of optimal monetary policy (54). They argue that the Taylor principle may apply in case of static nominal wage despite a high number of financially constrained consumers (Colciago 330). Bholat argued that an increase in financially included customers the output and inflation volatility rises when central bank uses policies to boost financial included and excluded consumers (170). The models reveal that the consumers impose a borrowing constraint, which affects the financially excluded.

Empirical Review. Mehrotra and Yetman’s investigations on how monetary policy is affected by financial inclusion used a PVAR and concluded that financial inclusion enhances consumption smoothing, reduces the expense of output volatility, and reinforces the central bank monetary policy (33). Additionally, they noted that the inclusion could trigger interest rates rise since larger economic population is put under the influence of interest rates. An examination of the association between the financial inclusion and monetary policy in Nigeria using 1980 to 2012 data demonstrated that the 1% loan and total advance increase resulted in a 0.01 reduction in inflation (Mbutor, and Uba 320). The outcome showed that financial inclusion favours the monetary policy low inflation target and that financial indicators do not support monetary policy efficacy since the aim of the banks is to make profits and not to support financial inclusion.

A VECM Model was used to analyse financial inclusion and monetary policy in 15 countries in Africa and it showed a strong relationship between inflation and financial inclusion and an insignificant link between the inclusion and monetary policy effectiveness in the region. It was rather noted that the effectiveness of the monetary policy drives financial inclusion. Another research on the eight South Asian Association for Regional Cooperation (SAARC) countries used data between 2004 and 2013. The FE model revealed that an increase in financial inclusion and interest rate reduced inflation by 0.284 and 0.743 percent respectively. The PCSEs model showed that and interest and exchange rates were negatively associated with inflation.

In South Africa, it was noted that there is poor transmission of impulses in monetary policy to the economy. The critical channels were the interest rate, rate channels, asset prices, exchange rate, expectations and credit, the rates only dispersed only two quarters of the initial impulse. Long-term interest rate was observed to be less responsive compared to the short-term rate (Montiel 83). A similar case was observed in Mauritius the monetary policy shock has a small effect of 0.2 on inflation and that the monetary policy rate shocks has significant impact on the headline CPI and not on the core CPI. Monetary policies that target the headline CPI may use the Taylor-type rules that focus on the channels of interest rates whereas the McCallum-type of rules that target money rules are effective on the core CPI. The monetary policy transmission was also notably weak due to the interest rate policy changes with respect to the interest rate in the market due to lagging and long-term constraints.

Financial Inclusion and Monetary Policy 
Monetary policy regulates the economy of Jordan. The central bank on several instances attempts to balance the economy through implementation of measures such as open market operations, the selling or buying of deposit certificates, and determining the lending or depositing rates (Bholat et al. 204). The monetary policy is successful in determining cash liquidity, the bank interest rates, and the deposits available within the banks. The monetary policy is used to regulate the economy. Additionally, it policy helps to maintain adequate levels of liquidity in the local banking structures and strives to enhance monetary and financial stability.

The financial processes such as lending and borrowing reflect the performance of monetary policy. Further, the availability of finances affects the stability of financial institutions and, hence, has an impact on the levels of investments and savings by individuals. In such a way, the monetary policy regulates integrity of the financial system and safeguards from the occurrence of illicit activities. In addition, there is adoption of policies such as the financial inclusions that creates the avenue granting everyone the access to financial services. The implementation of financial inclusion with thorough frameworks for supervision and regulation enhances the financial stability. The inclusion targets young people, low income earners, small enterprises, refugees, and micro-groups in an economy.

The Jordanian government plans to implement inclusion to contribute to national goals including long-term social development and economic expansion. The strategy is captured in the national vision and strategy covering from year 2018 to 2022. The overall aim of inclusion is to improve the welfare of the citizens in Jordanian economy and the financial services available to create equal opportunities for all people and institutions (Montiel 83). The successful implementation of the programs will in the long run help the country realize its potential to improve, thereby leading to economic growth.

The key sectors in Jordan economy that affects the economic growth include tourism, hospitality, manufacturing, agriculture, construction, and transport. The rate of unemployment is gradually increasing thereby leading to rise in poverty rate. Moreover, the country has high rate of refugees who are unemployed and dependent on government support. The statistics revealed by UNHCR on March 2017 reveals that there were 657,621 refugees from Syria who entered Jordan.

The framework for financial inclusion in Jordan has the priority areas that capture small and medium sized enterprises, microfinances, and digital financial services. The areas include laws and regulatory matters, protection of financial services consumers, data and research, and financial technology. The framework caters for all the population segments. However, the priority is given to the youths and the most vulnerable groups, including women, refugees, and those with lowest incomes.

Small and medium-sized enterprises finance (SMES) play a vital role in boosting the rapid growth of economy, creation of employment, and support entrepreneurship. Through the public private partnerships, the SMES enjoy the access to funding incentives and preference loan rates (Gali et al. 760). The digital financial services (DFS) accommodate mobile money infrastructure to deliver money either electronically or through the transfer services. The microfinances play the role of providing finances and financial services to the low income clients. Further, they help to reduce the gender gap, poverty, unemployment and they create positive economic growth. Moreover, the financial technology facilitates innovation and launching of startups through platforms, including mobile money credits, crowd funding and conventional financial services to enable capture investors. The financial technology infrastructure enables innovation, drives competition, and leads to growth in the economy.

The financial consumer protection aims at safeguarding the rights of banking and non-banking services through creation of legal framework that defines the relationship and interaction between the financial service providers and their clients. The protection ensures there is fair treatment, data privacy, responsible finance activities and enhances awareness. The goal is to enable inclusion leading to empowerment of the financial consumers. The data research enables the collection and processing of data that guide inclusion policies and plans. The details captured are used by policymakers to determine the financial services and development of sound evidence based policies. The laws and regulations in Jordanian financial system are instrumental in regulating services, duties, and relationships. In addition, the financial system structure comprises licensed banks and non-bank financial institutions which are regulated by the central bank of Jordan.

There are 16 banks in Jordan, and five are the major ones who comprise over 54.3 % of the entire sector. The total assets in the licensed banks at 2016 were amounting to 46.3 billion. The direct credit facilities amount to 48.6 of total assets. There are 8 microfinances which operate since they began in 1994. The leasing services are provided by 32 companies which include 8 bank subsidiaries. The currency exchange occurs through 136 licensed companies operating in 264 offices. Further, Jordan comprises five licensed payment system providers. Additionally, the economy is served by 24 insurance companies to the different sectors. However, there are only 33% of adult people who have bank accounts while the women have 27% usage of financial institutions. The inclusion has had the effect of allowing access of money to the rural areas.

The financial usage differs depending on the channel such as the youths, investment, and expenses. The access to the finances varies depending on the segments and levels of priority. Further, the access points determine the access to finances by enabling easy reach or access to finances such as mobile banking preference over the ATM`s.

Methodology and Data
The financial inclusion data is used in empirical studies to give information about the economy. Value index is applied to measure financial inclusion. The goal of monetary policy is to control inflation; hence, inflation is used as proxy during computations. There lacks the data on financial inclusions; as such, the research employs principal component analysis method to calculate inclusion index. The dimensions captured in calculations include demographic, geographic, and banking penetrations. The variables used help analyze the relationship of co-integration between variables, and relationship between money supply and inflation. The co-integration in the variables reveal the long-term relationship between variables in the study, in such a way, the vector error correction model can be applied to gain results. The Wald test is applied to test the short-run causality.

The inclusion policy in the finance and economic sector has the ability to regulate the economic growth. The financial inclusion opens the gaps and opportunity to attain balanced growth and creates fairness, thereby facilitating businesses. The inclusion and monetary policy regulate the flow of currency to prevent the occurrence of inflation. The small and medium income enterprises present opportunities for the youths and the disadvantaged people such as those with disabilities to ensure they gain access to finances. The inclusion has benefited from the use of technology trough mobile platforms. Further, there is economic growth realized due to the regulated flow of currency through monetary policy. Jordanian economy is negatively affected by high dependent population who include refugees, women, and youths.

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Works Cited
Ascari, Guido et al. “Limited Asset Market Participation: Does It Really Matter for Monetary Policy?”. SSRN Electronic Journal, 2011. Elsevier BV, doi:10.2139/ssrn.1948412.
Bholat, David M. et al. “Financial Inclusion and Central Banks”. SSRN Electronic Journal, 2015. Elsevier BV, doi:10.2139/ssrn.2671740.
Colciago, Andrea. “Rule-of-Thumb Consumers Meet Sticky Wages”. Journal of Money, Credit and Banking, vol. 43, no. 2-3, 2011, pp. 325-353. Wiley, doi:10.1111/j.1538-4616.2011.00376.x.
Gali, Jordi et al. “Rule-of-Thumb Consumers and the Design of Interest Rate Rules”. Journal of Money, Credit, and Banking, vol. 36, no. 4, 2004, pp. 739-763. Johns Hopkins University Press, doi:10.1353/mcb.2004.0064.
Mbutor, O., and I.A Uba. “The Impact of Financial Inclusion on Monetary Policy in Nigeria”. Journal of Economics and International Finance, vol. 5, no. 8, 2013, pp. 318-326. Academic Journals, doi:10.5897/jeif2013.0541.
Mehrotra, A, and J. Yetman. “Financial Inclusion and Optimal Monetary Policy”. Monetary and Economic Department, vol. 476, 2014, Accessed 16 Aug 2018,
Montiel, Peter J. “The Transmission Mechanism for Monetary Policy in Developing Countries”. Staff Papers – International Monetary Fund, vol. 38, no. 1, 2013, p. 83. Springer Nature, doi:10.2307/3867036.