Institutional Theory of Financial Inclusion

Introduction

The purpose of this chapter is to develop a new theory, known as the institutional theory of financial inclusion. This study is an extension of prior theoretical developments in the financial inclusion literature, notably the “theories of financial inclusion” developed by Ozili (2020). Since the theories of financial inclusion were first developed in 2020, efforts have been made to refine the theories and increase its application in different scenarios. The benefit of refining the theories of financial inclusion is that it leaves the field open for the introduction of new ideas. Therefore, as I observe my own work, the research of others, and the new developments in the financial inclusion space, I am convinced that a new theory needs to be formed to ensure that the theories of financial inclusion can cope with more complex external phenomena.

There are institutional theories in many disciplines. These institutional theories explain how organizational or social structures and processes acquire meaning and continuity beyond their technical goals (Suddaby, 2010). In this chapter, the application of institutional theory is extended to financial inclusion. The institutional theory itself is concerned with the processes by which formal and informal structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior (Suddaby, 2010; Munir, 2015; Willmott, 2015; Peters, 2022). The institutional theory explains how structures are created, diffused, adopted, adapted, and how they fall into decline and disuse over time (Scott, 2005). Understanding financial inclusion in the context of formal and informal institutions is important because institutional factors such as enduring rules, practices, laws, and structures can influence people’s decision making and also influence how they engage with formal financial services. It can influence people's decisions on how to access formal financial services, and it can have positive or negative implications for the level of financial inclusion in society.

In the literature, there has been much emphasis on the effect of institutional quality on the level of financial inclusion (e.g. Ali et al, 2021; Xu, 2020; Evans, 2018; Lashitew et al, 2019; Nguyen and Ha, 2021; Anthony-Orji et al, 2019; Nkoa and Song, 2020; Ouechtati, 2022; Kebede et al, 2021; Kwenda and Chinoda, 2019; Aracil et al, 2022; and Eldomiaty et al, 2020). These studies control for the effect of institutional quality on the level of financial inclusion. The emphasis on institutional quality as a control variable in financial inclusion empirical research reflects the need for independent formal institutions that can enforce rules without fear and carry out their duties fairly and with appropriate legal powers to sanction rule-breakers, in promoting financial inclusion. Other studies such as Muriu (2020) show that institutions such as rule of law are crucial in enhancing financial inclusion in sub-Sahara Africa (SSA). Berk Saydaliyev, Chin, and Oskenbayev (2020) found that remittances that increase financial inclusion are associated with better institutional quality, and the effect of remittances on financial inclusion is conditional upon individuals' perception of the institutions. Lachebeb et al (2021) show that better quality political institutions leads to a higher degree of financial inclusion. Ajide et al (2022) show that institutional governance indicators complement financial inclusion in reducing the constraints on financial access for the poor.