While financial inclusion is typically addressed by improving the financial infrastructure, we show that a higher degree of financial literacy also has a clear beneficial effect. We study this effect at the crosscountry level, which allows us to consider institutional variation. Regarding ‘‘access to finance”, financial infrastructure and financial literacy are mainly substitutes. However, regarding the ‘‘use of financial services”, the effect of higher financial literacy strengthens the effect of more financial depth. The causal interpretation of these results is supported by IV-regressions. Moreover, the positive impact of financial literacy holds across income levels and several subgroups within countries.

Introduction

Lack of financial inclusion is still a far reaching problem. The Findex data for 2014 show that 2 billion adults are unbanked; this number fell to 1.7 billion in 2017, still representing almost 40 percent of adults in the world (Demirguc-Kunt, Klapper, Singer, & Van Oudheusden, 2015, Demirgüç-Kunt, Klapper, Singer, Ansar, & Hess, 2018). Thus, financial inclusion, measured as access to and use of financial services, is an important goal of economic and, in particular, financial development; accordingly it has been argued to be an important policy tool that can help to achieve the Sustainable Development Goals (SDGs) (Klapper, El-Zoghbi, & Hess, 2016). It is hence of high interest for policy makers to learn about drivers of financial inclusion and how these can be influenced by national policies. The positive impact of financial depth on growth and (less income) inequality has been well established in the literature (Beck, Demirguc-Kunt, & Peria, 2007; Levine, Loayza, & Beck, 2000). By contrast, there is less evidence for a link between financial inclusion and economic growth or inequality, but existing evidence points into this direction (Demirguc-Kunt, Klapper, & Singer, 2017). For example, improved financial inclusion can decrease rural poverty (Burgess and Pande, 2005), increase employment (Bruhn and Love, 2014), expenditures (Dupas and Robinson, 2013) and savings (Brune, Giné, Goldberg, & Yang, 2016). Hence, better financial inclusion can have welfare effects that extend beyond benefits in the financial realm to the real economy. Research at the country level documents the state of access to financial services (Beck et al., 2007): It shows that better financial inclusion is related to country and institutional characteristics, such as more financial depth, physical proximity of financial institutions, low costs for financial accounts, or a strong legal system (Allen, Demirguc-Kunt, Klapper, & Peria, 2016). Thus, country studies on financial inclusion so far focus on the supply side of financial markets. However, shouldn’t financial development consider more than the various aspects of financial infrastructure and legal background? Which role does the demand side play? It seems plausible that functioning financial markets do not only need good infrastructure but also informed customers, i.e. customers with a higher degree of financial literacy. Informed customers make better financial decisions for themselves and for their businesses, they support the effectiveness of the financial system by demanding more sophisticated financial services and they will demand financial inclusion. If, indeed, the degree of financial literacy makes a difference for financial inclusion, this seems to have a clear policy message.