When Does Digital Finance Deliver Inclusion? Regulatory Quality and Government Effectiveness in Developing Economies

Abstract

Purpose – This study tests whether digital finance expands meaningful financial inclusion in developing economies and whether Regulatory Quality and Government Effectiveness condition that relationship. Design/methodology/approach – An unbalanced panel of 411 observations from 49 low- and middle-income economies (2014–2024) combines IMF and World Bank data. Two-way fixed-effects models use country-clustered standard errors. Inclusion is a principal-component index of formal saving and credit use; digital finance is observed mobile- and internet-banking transactions.

Findings – Digital finance has a positive but imprecise average association with inclusion. Regulatory Quality and Government Effectiveness are positively associated with inclusion, but both interactions are negative (β = −0.072, p = 0.033; β = −0.054, p = 0.030). Digital-finance gains are concentrated in weaker institutional settings. Lagged models preserve the pattern.

Originality – The study identifies institutional substitution that is obscured when governance is only a control. It distinguishes rule quality from implementation capacity and separates digital activity from inclusion outcomes.

Practical implications – Digital channels may yield their largest incremental gains where conventional institutions are weakest. Governance nevertheless remains essential for consumer protection, competition and sustainable financial use.