Financial Inclusion and Financial Behavior: Empirical Evidence from an Emerging Economy

Abstract

This empirical paper investigates the impact of financial inclusion through formal account ownership on the financial behavior of the adult population in Bangladesh, utilizing micro- data from the World Bank Global Findex Database 2021. To address potential selection bias and ensure robust causal inference, the study applies propensity score matching (PSM) and inverse probability weighted regression adjustment (IPWRA) techniques, both of which are widely used quasi-experimental econometric techniques. The results of the study reveal that formal account ownership serves as a critical mechanism for shifting savings and borrowing towards formal financial institutions. Nonetheless, the evidence suggests that ensuring mere access to formal account ownership is insufficient to fully replace informal financial prac- tices, underscoring the need for understanding and effective use of formal financial services. The application of alternative matching algorithms produces consistent results, therefore, reinforces the validity and robustness of the main findings. Further analysis reveals signifi- cant gender heterogeneity, indicating that formal account ownership significantly enhances women's access to formal credit, potentially through more favorable lending policies for women. Additionally, education-based heterogeneity reveals that financial inclusion sub- stantially increases formal savings among disadvantaged individuals with limited or no ed- ucation. This study makes an important contribution to the empirical literature on financial inclusion by providing robust evidence on its behavioral effects in an emerging economy context. The findings of the study offer important policy implications and advocate for pol- icies and interventions aimed at expanding access to formal financial services while also paying attention to in-depth financial literacy to reduce dependence on informal finance and promote economic empowerment.