Date of Award

August 2024

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Rebecca Neumann

Committee Members

Kundan Kishor, Mohsen Bahmani, Jangsu Yoon

Keywords

Financial Inclusion, Financial Openness, Macroeconomic Uncertainty, Small Firm Borrowing

Abstract

This dissertation consists of three chapters on the financial inclusion of individuals and small firms. Chapter 1 examines the impact of financial openness, which measures a country’s level of capital account openness, on its degree of financial inclusion, which refers to the accessibility and utilization of financial services, particularly among individuals from low-income, marginalized, and disadvantaged communities. Using country and time fixed effects regression estimation in a panel data set of up to 102 countries for the largest sample from 2004 to 2017, I find that a higher degree of de facto capital account openness, measured by the Lane and Milesi-Ferretti index, has a limited positive impact on financial inclusion, as measured by the number of loan accounts, number of household loan accounts and number of household deposit accounts. While these results are sensitive to the sample, and using different sets of controls changes these samples, and perhaps to the methodology, there is still evidence that LMF has a positive and significant effect on inclusion. Other measures of financial inclusion, namely number of borrowers and number of depositors, show no response to greater financial openness. The Chinn-Ito KAOPEN measure of financial openness tends to show neither a positive or a negative impact on financial inclusion. This finding suggests that greater financial openness does not reduce financial inclusion in most cases, and potentially de facto financial openness may increase it for particular measures, perhaps indicating an increased ability of savers to diversify their funds more, across different types of deposit accounts, and with an increased number of loan accounts for borrowers to better suit their financial needs. These results hold after controlling for the domestic degree of financial development, which is the overall size of the financial sector, and after controlling for the domestic level of institutional quality. While the Lane and Milesi-Ferretti index has a positive impact on the number of accounts, particularly at the household level, institutional quality appears to affect the number of borrowers and number of depositors. In light of several events of high uncertainty in recent years, such as the US-China trade tensions and Brexit, it is important to examine how uncertainty may impact country borrowing. Chapter 2 investigates the link between country level uncertainty using the World Uncertainty Index (WUI) developed by Ahir et. Al (2022) and small and medium enterprise (SME) outstanding loans as a percentage of total loans. Using a sample of 50 countries from 2004 to 2019 and fixed effects estimation, this paper shows that higher macroeconomic uncertainty measured by the WUI is associated with a lower percentage of SME outstanding loans in total outstanding loans, with a stronger impact in higher income countries. I hold constant several important supply side variables. Thus, this effect likely operates through the demand side channel, decreasing either SME’s desire or their ability to borrow due to firm characteristics, relatively more than for large firms and households. Previous literature has shown that a lower proportion of SME loans in total loans is detrimental for banking sector stability, while a higher proportion improves financial sector stability. The findings of this paper suggest that policies targeting the promotion of SME investment, coupled with assistance for SMEs during periods of uncertainty, could reduce the decline in the SME share, and thus improve financial sector stability during periods of higher uncertainty. Chapter 3 examines the impact of financial development, economic development and macroeconomic uncertainty on the micro, small and medium enterprises (MSMEs) finance gap. The MSME finance gap is constructed by the International Finance Corporation (IFC), and it is the difference between the amount of finance MSMEs desire and the amount these firms receive. IFC also provides data on the demand and supply sides separately, as well as decomposed into micro versus small and medium enterprises, which allows for additional analyses. As this data is available for 2017 only, this study is cross-sectional for several developing countries. I find that the level of domestic financial development is important for diminishing the MSME finance gap, through its positive impact on the supply side, effects which are driven by SMEs. Higher levels of economic development are also important for the finance of MSMEs, as they increase both the supply and demand for finance for MSMEs. These offsetting effects translate into no impact of economic development on the MSME finance gap. There is some evidence that a higher WUI diminishes the SME finance gap in richer countries, and this effect is due to a decrease in demand of SMEs during periods of high uncertainty.

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