Foreign bank presence, institutional quality, and financial inclusion: Evidence from Africa

Abstract

Financial inclusion is recognized as a key factor for promoting social development, inclusive growth, equal opportunity, and human development. Despite the consensus regarding the importance of financial inclusion, little is known about its nexus with cross-border banking in an ever-increasing financial globalization. We examine the effect of foreign bank presence on the various dimensions of financial inclusion using panel data for 17 African countries from 2004 to 2018. We find that foreign banks reduce financial inclusion when the degree of foreign bank presence is high. We show that the effect of foreign bank presence on financial inclusion depends on institutional quality, with its impact turning from negative to positive when institutional quality increases to a higher level. The results are robust to different sensitivity analyses. Our results imply that promoting institutional quality is essential to use foreign bank presence as an opportunity for ensuring an inclusive financial system.