The Effects of the Informal Sector on Financial Inclusion in Sub-Saharan Africa: Do ICTs and Economic Freedom Matter?

The objective of this study is to examine the effect of shadow economy on financial inclusion. We identify the robust effects and channels through which the shadow economy affects financial inclusion using a sample of 25 Sub-Saharan African countries over the period 2010-2018. The empirical evidence is based on fixed effects (FE) and system-Generalized Method of Moments (Sys-GMM). Our results show that shadow economy negatively and significantly affects all the dimensions of financial inclusion measured by penetration, availability, and usage of financial services as well as the financial inclusion index. These effects are mediated by Information and Communication Technologies measured by internet, mobile phones and telephone and by the institutional environment captured by economic freedom. We suggest the strengthening of telecommunication infrastructures as well as the establishment of an incentive framework in order to reduce informality in the economy for a better financial inclusion.