Dynamic impact of financial inclusion and industrialization on environmental sustainability

Purpose The study aims to investigate the impact of financial inclusion (FI) on environmental quality and the mediating role of industrialization (IZ). In addition, these relationships among the counties with different levels of income and carbon emissions were also analyzed. Design/methodology/approach This paper used the International Monetary Fund database for indicators of FI. The environmental indicators were obtained from the World Bank database for a panel of worldwide countries from 2004 to 2019. Separate indices of environmental sustainability (ES) and environmental degradation (ED) were created by using principal component analysis . The generalized method of moments regression was applied to examine the relationship between variables. Findings The study found full mediation of IZ between FI and ES, whereas partial mediation between FI and environmental degradation. The results were found robust against alternative measures of carbon emissions. Furthermore, the study also bifurcated the sample according to the level of income and carbon emission. It was found that FI plays a positive role in the betterment of environmental quality for high-income countries, while a negative role in upper-middle-income, lower-middle-income and low-income countries. Besides, FI has a negative role in the ES of the countries having higher or lower carbon emission levels. Originality/value Empirically this study contributes by creating two different novel measures of ES and environmental degradation, in contrast to other studies that solely relied on carbon emission. Contrary to previous studies, this study suggests that FI is not solely responsible for environmental damages, and IZ is the key channel by which FI shifts its impact on ES. Moreover, for environmental degradation, there are some other channels involved that need to be investigated further. This study has also noted that the relationship between FI and ES is context-dependent. Theoretically, this paper contributes to the literature by using ecological modernization theory in the nexus of FI, IZ and environmental quality.

Automated summary

This study investigates the impact of financial inclusion (FI) on environmental quality and the mediating role of industrialization (IZ), and analyzes these relationships among counties with different levels of income and carbon emissions. The study finds that industrialization fully mediates the relationship between FI and environmental sustainability (ES), while partially mediating the relationship between FI and environmental degradation. It is also observed that the relationship between FI and ES is context-dependent, with FI having positive effects on high-income countries and negative effects on upper-middle-income, lower-middle-income, and low-income countries. Furthermore, FI has a negative impact on ES in countries with higher or lower carbon emission levels.