University of Stellenbosch Business School (USB)

Permanent URI for this community

https://scholar.sun.ac.za/handle/10019.1/75

Browse

Browsing University of Stellenbosch Business School (USB) by browse.metadata.advisor "Ashenafi Beyene, Fanta"

Now showing 1 - 1 of 1
  • Thumbnail Image
    Item
    Quality financial inclusion, financial vulnerability, and subjective well-being : evidence from South Africa
    (Stellenbosch : Stellenbosch University, 2023-03) Kudakwashe Joshua, Chipunza; Ashenafi Beyene, Fanta; Stellenbosch University. Faculty of Economic and Management Sciences. University of Stellenbosch Business School.
    ENGLISH SUMMARY: Financial inclusion has been at the forefront of the policy agenda in many developing countries due to its potential to improve consumers’ welfare as indicated by, for example, subjective well-being, financial vulnerability, and financial resilience. Beyond the provision of basic financial products, the policy is shifting to improving the quality of financial inclusion which refers to the use of diversified financial products that are flexible, easy to understand, appropriate, and affordable. This is important considering that although 84% of adults in South Africa own bank accounts, consumers remain financially vulnerable, and the subjective wellbeing of consumers, measured by life satisfaction, remains lower relative to other emerging and developed economies. Moreover, only 18% of consumers in South Africa can raise emergency funds which might make it difficult for them to be financially resilient to adverse shocks. The need for financial resilience has been brought to the fore by the recent COVID-19 pandemic which rendered many consumers in South Africa unable to meet basic living costs. To understand how quality financial inclusion could enhance subjective well being, bolster financial resilience, and reduce the financial vulnerability of consumers, the thesis has been divided into four empirical chapters. The study is based on the FinScope 2015 consumer survey of South Africa except for chapter three where the FinScope 2021 consumer survey of South Africa was used. The first empirical chapter computed a multi-dimensional demand-side measure of quality financial inclusion using polychoric principal component analysis. This composite index of quality financial inclusion was more comprehensive than previous measures since it captured indicators of affordability, flexibility, and appropriateness which had been excluded in previous composite indices. This is pertinent because an indicative measure of one’s inclusion in the financial system should capture as many dimensions as possible. Moreover, the inclusion of these dimensions is consistent with the utility maximisation theory, bounded rationality theory, and preference for flexibility theory which suggest that consumers derive value from using financial products that are affordable, appropriate, and flexible. Employing an ordinary least squares regression, the results suggest that females had higher quality financial inclusion than males while bank distance was a statistically insignificant determinant. The proposed index of quality financial inclusion could be used by researchers in assessing how a broader focus on financial inclusion influences consumers’ welfare. The second empirical chapter examined the impact of quality financial inclusion on consumers at various levels of financial vulnerability. The link between the use of financial products and financial vulnerability is explained by the capital conduit theory, social insurance theory, and debt intermediation theory. These theories assert that insurance hedges the risk of unforeseen life events while saving platforms and credit can help consumers to invest in income-generating projects, which contribute to lower financial vulnerability. However, previous composite measures of financial vulnerability excluded dimensions of saving vulnerability and lifestyle vulnerability. Therefore, this study makes a methodological contribution by computing an index of financial vulnerability that captures dimensions of saving vulnerability, expenditure vulnerability, and lifestyle vulnerability. Moreover, unlike previous studies that relied on single indicators or narrower indices of financial inclusion, the study extends extant literature by examining the link between a broader measure of quality financial inclusion and consumer financial vulnerability. The results from the method of moments quantile regression analysis showed that consumers with the highest quality of financial inclusion (top 20%) were less financially vulnerable, but this was less pronounced among the more vulnerable consumers. Implicitly, policymakers and financial institutions need to improve the quality of financial inclusion as this contributes to the enhancement of consumers’ welfare through the mitigation of financial vulnerability. The third empirical chapter examined the role of various channels of financial inclusion in building financial resilience to the COVID-19-induced income shock. The link between financial product use and financial resilience is explained by social insurance theory, risk sharing models, and precautionary saving theory. These theories suggest that consumers can become financially resilient to shocks by purchasing insurance, receiving remittances, and postponing current consumption. However, previous studies focused on the role of financial inclusion on financial resilience to agricultural sector-specific shocks and region-specific shocks. Therefore, the current study contributes to the literature by examining the various channels of financial inclusion through which consumers enhanced their financial resilience to the nationwide COVID-19 pandemic that reduced the income of most consumers. Results from propensity score matching suggested that consumers that employed formal channels to save, insure and borrow did not experience a statistically significant decline in consumption after the COVID-19-induced income shock. Also, a robustness check showed that indebted consumers employing both formal and informal channels were not financially resilient to the COVID-19- induced income shock. These results suggest that policymakers ought to increase access to formal financial services and complement it with financial education programs targeting debt management to build financial resilience to adverse economic shocks in the future. The fourth empirical chapter contributed to the empirical literature by examining whether an improvement in the quality of financial inclusion could indirectly enhance the subjective wellbeing of consumers via asset accumulation. The study was based on the theory of institutional saving, Quach’s (2016) theoretical model, and social insurance theory which suggests that saving, credit, and insurance could improve asset ownership. In turn, an increase in asset endowment could enhance the subjective well-being of consumers according to the asset effects theory. To this end, the chapter extends previous literature that had only examined how various channels of financial inclusion had influenced asset accumulation by examining whether this, in turn, improves the subjective well-being of consumers. The results from the partial least squares path model suggested that an increase in the quality of financial inclusion had a positive indirect effect on the subjective well-being of consumers via asset accumulation. The implication to social policymakers is that an improvement in the quality of financial inclusion could indirectly enhance the subjective well-being of consumers via asset accumulation. The overarching evidence presented in this thesis suggests that an improvement in the quality of financial inclusion can play a significant role in reducing financial vulnerability and indirectly improving the subjective well-being of consumers via asset accumulation. Moreover, the evidence emerging from the study suggests that increased access to formal financial services bolsters consumers’ financial resilience and prepares them against future economic shocks. Noteworthy, the study relied on a cross-sectional dataset of South Africa hence future studies should employ panel data to assess the dynamic link between quality financial inclusion, financial vulnerability, and subjective well-being.