Impact of financial inclusion on firm borrowing and performance in selected African countries

This study investigates the impact of financial inclusion on firm borrowing, growth, and performance, focusing on a sample of firms from 10 selected manufacturing firms in African countries between 2010 and 2019. The research has three key objectives: (1) to examine how financial inclusion influences firms' borrowing capacity, (2) to analyze its effect on firms' growth, and (3) to assess its impact on firm performance. The study uses the two-step system Generalized Method of Moments (GMM) as the primary estimation technique. GMM is particularly suited for addressing dynamic relationships and potential endogeneity, making it ideal for examining how financial inclusion affects firm-level outcomes over time. This method ensures the results are robust and reliable, accounting for unobserved differences across firms and countries. The findings reveal that financial inclusion significantly positively affects firm borrowing. Firms with better access to financial services are more likely to secure the financing they need, which is especially important in Africa, where many businesses, small and medium-sized enterprises (SMEs), face difficulties accessing credit. Financial inclusion helps to bridge this gap by offering a wider range of financial products, making it easier for firms to obtain loans and other forms of capital for investment and expansion. In addition to borrowing, financial inclusion also positively impacts firm growth. Firms that can access various financial services are better positioned to invest in new projects, hire additional employees, and expand their operations. This highlights the role of financial inclusion in enabling firms to obtain financing and use it effectively to drive growth and scale their business activities. The improved access to financial products helps firms grow in size, market reach, and capacity. The study further finds that financial inclusion positively affects firm performance. Firms with better access to financial services tend to perform better in profitability, productivity, and competitiveness. Whether measured through metrics like return on assets or sales growth, firms with greater financial inclusion perform better across the board. This shows that access to reliable and affordable financial services is crucial for firms to manage their resources effectively, invest in productive assets, and stay competitive. The study's results are consistent across different model specifications and various measures of financial inclusion, underscoring the robustness of the findings. For financial managers, the study suggests that adopting financial inclusion strategies can help attract deposits and raise capital, fueling growth initiatives. For policymakers, the research points to the need for supportive regulations that encourage the development of financial markets, enabling more firms to access financial services and capital. This research contributes to understanding financial inclusion's role in firm-level outcomes in African countries. Combining financial inclusion and trade-off theories thoroughly explains how access to financial services drives borrowing, growth, and performance, offering valuable insights for businesses, policymakers, and researchers interested in the economic impacts of financial inclusion.

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