The relationship between political instability and financial inclusion: Evidence from Middle East and North Africa

Abidin Alhassan, Leon Li, Krishna Reddy and Geeta Duppati

International Journal of Finance & Economics, 2021, vol. 26, issue 1, 353-374

Abstract: What is the effect of political instability on financial inclusion (FI) in the Middle East and North Africa region? Using data for 2011, 2014, and 2017, from the Global Findex database, we test the asymmetry relationship between political instability and FI using the probit model with sample selection and a multiplicative interaction test of the asymmetric model. We also propose and test a political stability threshold model that may trigger FI. We find that (a) political instability positively correlates with lower degrees of FI with higher levels of persistence; (b) higher incomes and higher education are associated with higher degrees of FI; (c) a lack of documentation required by formal financial institutions proves to be a major barrier to FI; and (d) inefficient mechanisms to determine real interest rates, corruption, oil reliance, unemployment, and religious tensions also negatively affect FI. Further, we calculate the political stability threshold level that will trigger FI to be ‐0.960 for the Middle East and North Africa region. The policymakers could enhance and promote FI and economic well‐being by targeting the minimum threshold value of political stability.

Date: 2021
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