Exchange rate and financial inclusion

The relationship between financial inclusion and exchange rate has not received any attention in the literature. This study investigates the effect of the official exchange rate on the level of financial inclusion. A sample of 17 countries were analysed from 2012 to 2020. Four financial inclusion indicators were used in the analysis: the number of ATMs per 100,000 adults variable, the number of bank accounts (or depositors) per 1,000 adults variable, the number of commercial bank branches per 100,000 adults variable, and a financial inclusion index. The correlation result shows that financial inclusion and exchange rate are negatively correlated while the regression result shows that a weakening official exchange rate or currency depreciation has a significant positive impact on financial inclusion through increase in the number of bank depositors (or bank accounts) and increase in the number of commercial bank branches. The findings support the argument that currency depreciation will lead people to take more loans which will increase bank profitability and encourage banks to expand to new locations to acquire new depositors, thereby increasing financial inclusion. The implication of the study is that currency depreciation is beneficial effect for financial inclusion. It is recommended that policymakers should determine the right level of currency depreciation (or devaluation) that is needed to support national financial inclusion efforts and they should manage the exchange rate around that level.