The Non-Linear Relationship between Financial Access and Domestic Savings

This paper examines the impact of financial access on the accumulation of domestic savings in sixteen emerging market economies included in the Morgan Stanley Capital International emerging market index. The countries represent Asia, Latin America, Europe, Middle East, and Africa. We use the System Generalized Method of Moments panel estimation methodology on annual data (representing) spanning the period 1980-2018. Principal component analysis allows us to create a financial access index as a linear combination of two variables measured per 100,000 adults: number of bank branches per and number of ATMs. We also use the common control variables for a domestic saving regression including current account balance, real interest rate, the age dependency ratio, inflation, and domestic credit and private sector growth in our analysis. The results of the paper reveal a convex and non-monotonic statistically significant relationship between financial access and domestic savings. The financial access index has a non-linear effect on domestic savings with a cutoff point of 86.5 points. Our results indicate that improvement in financial access may increase the savings rate initially by 0.0173%, leading to an increase in investments, further improvement in financial access leads to slight decline of about 0.0002% in savings as households’ precautionary savings decrease.