Key Determinants of Financial Inclusion: An Empirical Evidence from Western Balkan Countries

The objective of the paper is to analyze the financial inclusion and its main determinants in Western Balkan countries using annual data from year 2005 to 2018. In order to quantitatively aggregate diverse measures of inclusion, principal component analysis (PCA) was used to construct overall index of financial inclusion for each constituent country (Albania, Bosnia & Herzegovina, Kosovo*[ This designation * is without prejudice to positions on status and is in line with UNSCR 1244/1999 and the ICJ Opinion on the Kosovo* declaration of independence], Montenegro, North Macedonia, and Serbia), by using the seven different indicators of financial inclusion. Those indicators are the primary proxies for the two important qualitative aspects of financial inclusion—financial access and financial usage component. In addition, pooled panel data regression analysis has been adopted to measure the impact of Internet and mobile subscriptions on financial inclusion, along with other macroeconomic variables, such as gross domestic product (GDP) per capita, unemployment, and real interest rate. Results have shown that there is strong relationship, primarily between economic growth, Internet, and mobile usage with the level of financial inclusion. Empirical findings have also revealed negative relationship between financial inclusion and real interest rate and unemployment.