The relationship between financial inclusion and inclusive growth in South Africa

Purpose This study aims to examine the relationship between financial inclusion and inclusive growth in South Africa using time series data from 2000 to 2022. Design/methodology/approach The study utilizes principal component analysis (PCA) to construct composite indices for financial inclusion and inclusive growth. It employs the autoregressive distributed lag (ARDL) model to examine long-term relationships, complemented by unit root tests, fully modified ordinary least squares for cointegration analysis and Granger causality tests to identify causal relationships. Findings The study finds a positive long-run relationship between financial inclusion and inclusive growth in South Africa. Financial inclusion significantly impacts inclusive growth, with financial access, availability and penetration contributing positively. However, financial usage shows limited statistical significance. The findings highlight financial inclusion's role in addressing inequality and promoting economic stability. Research limitations/implications The study's results underscore the importance of financial inclusion in driving inclusive growth in South Africa. Policy implications include the need for reforms to reduce transaction costs and enhance microfinance access, particularly for small, medium and micro enterprises and/or micro, small and medium enterprises. Additionally, integrating technological advancements to expand financial literacy and service usage among low-income households can bridge financial gaps and support sustainable economic development. Originality/value The originality of this study lies in its focus on South Africa, a context often overlooked in financial inclusion research, despite its socioeconomic disparities. Using time series data from 2000 to 2022, the study employs PCA and ARDL modeling to construct multidimensional indices for financial inclusion and inclusive growth. It uniquely identifies policy-oriented solutions, such as reducing transaction costs and fostering microfinance, tailored to South Africa’s specific challenges in achieving inclusive growth.