Financial Inclusion and Economic Growth Across the Globe: The Role of Anti-money Laundering Regulations

Abstract

This study examines the moderating effect of anti-money laundering (AML) regulations on the relationship between financial inclusion and economic growth, and investigates whether this impact is threshold-specific. Utilising a panel dataset from 213 countries (2012–2019), we employ a two-step system, Generalised Method of Moments (GMM) and the Seo et al. (2019) dynamic panel threshold regression model. Our findings confirm that financial inclusion generally stimulates economic growth. Crucially, we demonstrate that the impact of financial inclusion on economic growth is contingent on the intensity of AML regulations. Specifically, financial inclusion promotes growth below a certain threshold of AML regulation, but surprisingly, it inhibits growth when AML regulations exceed this threshold. This threshold effect is particularly pronounced in developing and African economies compared to developed countries. Theoretically, this study extends the understanding of financial inclusion and economic growth by introducing a critical non-linear moderating role for AML regulations, suggesting that an optimal level of regulation exists beyond which the intended benefits may be reversed. Policy implications underscore the need for regulators to consider these threshold effects when designing and implementing AML frameworks, ensuring that financial inclusion continues to drive economic growth effectively.