The financial inclusion agenda: Examining the role of conventional banks in deepening access to formal credit

• We investigate the impact of banking system penetration on financial inclusion in Ghana.
• We exploit a change in the policy environment of the banking system to instrument for bank branch expansion.
• Less financially developed districts experience increased bank branch penetration in the post-2006 period.
• Banking system penetration promotes financial inclusion, notably, access to bank and formal credit.
• The policy environment that guides banking operations matter in deepening the extent of financial inclusion.

Using a unique district-level panel dataset, we investigate the effect of banking system penetration on financial inclusion in Ghana. To purge potential endogeneity bias in the underlying relationship, we exploit a change in the policy environment of the Ghanaian banking system to instrument for bank branch expansion. We show, first, that the switch from the compartmentalized system of banking to the universal banking system in Ghana has resulted in an expansion of banks’ branch network, which has benefited hitherto financially less developed districts. Second, our instrumental variable evidence suggests that banking system penetration promotes financial inclusion—notably, access to bank credit and to formal credit. The results of this paper provide important insights into the role of policy in enhancing financial inclusion.