The Dynamic Effect among Institutional quality, Financial Inclusion, and GDP Growth in MENA Countries: Evidence from FMOLS and DOLS Approaches

Growth-promoting policies must be informed by a deeper understanding of the factors that influence economic growth, particularly institutional quality and financial inclusion. While numerous studies examine single relationships between these variables and economic growth, only a limited number analyze the collective impact of all three components. This paper investigates the long-run relationships among financial inclusion, institutional quality, and economic growth for a sample of 19 MENA countries. Using FMOLS and DOLS approaches, the findings indicate a positive correlation between institutional quality and economic growth, underscoring the importance of institutional quality as a determinant. In contrast, the variable of financial inclusion shows no significant influence on economic growth. Additionally, institutional quality seems to have an adverse impact on financial inclusion. This has substantial policy implications, as poor institutional frameworks hinder economic growth in MENA countries. Improving the business environment and developing transparent institutional and legal systems are necessary steps if these countries are to reap the benefits of economic growth alongside financial inclusion. Low current levels of financial inclusion, limited expansion of banking services, political instability, restrictive regulations, lack of financial awareness, and cultural skepticism about traditional banking practices are major factors behind the limited impact of financial inclusion. Enhancing banking sector efficiency, supporting SMEs, and promoting innovative technologies in digital payments would help steer financial inclusion toward stimulating economic growth. Reducing financial service costs, regulating the informal sector, and fostering a strong culture of financial literacy are desirable policy measures for achieving these goals effectively.