There is growing evidence that developing financial institutions and financial
markets and improved access to finance has a strong impact on economic
development, poverty alleviation and economic stability. An inclusive financial
system is able to reduce poverty, boost shared prosperity and support inclusive
and sustainable development. Theoretical and empirical research has found
increasing evidence of the role of finance in economic growth. According to
Levine (2005), a well-functioning financial system would remove financial
constraints faced by industries and firms and improve access to finance that is
required for economic growth. Realising the importance of finance for growth,
many countries are pursuing active strategies to develop their financial institutions
and markets as well as improving the access to financial services and products
for a wider segment of the population, particularly for low-income groups.
Financial inclusion facilitates greater participation by different segments of
the population in the formal financial system. A large informal sector can affect
the transmission of monetary policy as a large number of economic agents would
base their financial decisions independent of the monetary policy actions of the
central bank. With increased financial inclusion, the share of households and
small businesses in the formal financial sector increases, thereby improving the
effectiveness of the monetary policy transmission mechanism.