Impact of Financial Inclusion and Liberalization on ASEAN Economic Development

Abstract

This dissertation includes seven chapters. In chapter 1, we provide the focus and motivation of the PhD research in terms of examining the impacts of financial development and financial inclusion on ASEAN LDCs, particularly on Cambodia. The literature on the financial inclusion and its measurement are clearly identified and discussed in chapter 2. This chapter aims to highlight the important role of financial inclusion in the economy, particularly in poverty reduction and accelerating economic growth. An inclusive financial system has both economic and social benefits based on the efficient allocation of productive resources leading to the reduction of the cost of capital and hence contributing to achieving the goals of growth. In addition, an increase in access to financial services also appears to be associated with poverty reduction as more vulnerable population have access to important financial resources to invest and improve their living standards. However, policy effectiveness is dependent on accurate measurement of the level of financial inclusion, which remains a major obstacle due to the availability and quality of data. To fill in the data gap for the estimation of financial inclusion, it is important to understand the data generation process in terms of data collection, essentially from both demand and supply sides of financial inclusion. The chapter clearly identifies the demand and supply-side of financial inclusion in the domestic economy. More robust measurement of financial inclusion is needed to take into account various economic and social dimensions in specific country, which are crucial in pursuit of key policy initiatives. In chapter 3, we discuss the ASEAN financial integration process and structure in line with regional integration of economic and financial structure. Financial integration is one of the objectives of ASEAN in order to develop a strong ASEAN Economic Community with a shared destiny. Financial inclusion is considered as one of the key catalysts of financial integration as it enhances access to cross-border remittances to support regional labour mobility, enhancing SMEs financing for trade, and also increase the cross- border investments that enables domestic firms, especially the SMEs, to benefit from greater access to markets. Financial inclusion promotes financial integration through financial stability as the later would enhance the resilience of financial system. Chapter 4 identifies the key trends and examines the determinants of financial inclusion in ASEAN countries. The Global Findex dataset is employed to examine the determinants of financial inclusion in terms of (a) account ownership at formal financial institution, (b) individuals holding saving account at formal financial institution, and (c) usage of bank credit. The results indicate that status of employment and education are two key variables that will promote financial development and inclusion in the ASEAN region. Individual employment and the ability to earn seem to the key determinants for financial market development in the region. Both of these variables have high correlation to the economic growth and development in the ASEAN countries. The result also indicates that education and educated individuals tend to use the financial services more actively than less educated individuals. This highlights key policy issue on a need to develop strong financial education for less educated individuals to use more financial services that will have positive impact on their welfare. The impacts of financial intermediation and financial inclusiveness on saving behavior of developing economy such as Cambodia using individual data from Global Findex database in 2017 is examined in chapter 5. The results indicate that financial intermediation has positive impact on the financial inclusion in terms of increasing the overall saving behavior through saving at a bank or financial institution and reducing the informal savings of households with saving clubs and/or saving cooperatives. Furthermore, in comparing financial market development of Cambodia and Vietnam, the findings show that Cambodia has high degree of openness in its financial market compared to Vietnam. However, Vietnam has a higher level of financial inclusiveness compared to Cambodia. This finding suggests that (1) financial sector openness is not the only criteria to further improve financial inclusion, and (2) effective financial intermediation (deposit creation), as in Vietnam, tends to increase financial inclusion and increase the saving of the poor segment in the domestic economy. In chapter 6, we provide an alternative measure of financial inclusion using administrative level data. This chapter employs supply-side data collected from financial services providers and data from Credit Bureau Cambodia to measure the level of access and usage of formal financial services (credit, savings, insurance, e-wallet) by adult population in Cambodia. The findings suggest that the level of access to formal financial services is relatively high at 73%., which is higher than the Global Findex measure of 22% for Cambodia. From these measurements, it is clear than financial inclusion in Cambodia is driven by two basic products: credit and savings. The chapter highlights the need in policy measures to encourage access to insurance products which is particularly crucial to provide safety nets for low-income households. Furthermore, the findings also suggest that microfinance institutions play important role in financial inclusion efforts. It is noting that not all MFI in Cambodia are allowed to take deposits, only 7 MFIs, while the rest are only allowed to provide credit. In chapter 7, we summarize the key results of the thesis and discuss policy options for promoting financial inclusion at both country and regional levels.