Financial Inclusion and the Informal Sector

This paper explores the relationship between the informal sector and financial inclusion for a sample of 186 countries across the period 2004-2018 and using various methods of estimations—ordinary least squares, instrumental variables, fixed effects, and general method of moments. The results show financial inclusion significantly reduces the size of the shadow economy with all indicators of access and usage of financial services. The result is also robust when considering the income level, in that financial inclusion reduces informality in all categories of countries by income level. These results strongly support the use of financial inclusion as an effective vehicle to lessen informality