Digitalisation and financial inclusion of lower middle-income ASEAN

Abstract

Recent studies reasoned that digitalising business processes support financial inclusion, resulting in greater economic activities and growth. Digital financial inclusion is argued to be accessible to some privileged and digitally savvy individuals. However, digitalised financial services do not always guarantee financial inclusion. This study examines how the digitalisation of business processes might instil financial inclusion in lower-middle-income ASEAN economies. Based on the Diffusion of Innovation (DOI) theory, the digitalisation of business processes is modelled by fixed high-speed broadband, mobile and cellular subscriptions as a predictor of financial inclusion. The pooled mean group estimation of the autoregressive distributed lag (ARDL) model is employed to determine the effect of digitalisation on the financial inclusion of Cambodia, Indonesia, Laos, Myanmar, the Philippines and Vietnam economies. The key finding is the significance of digitalisation in inducing the financial inclusion of lower-middle-income ASEAN economies. The digitalisation of business processes significantly affects the accessibility of private businesses to domestic credit provided by their banks.

1. Introduction

Digitalisation is applying digital technologies to improve business practices and facilitate exchanges. The digitalisation of business processes positively and significantly enhances productivity [1] and business capabilities [2]. Firms that digitised their business processes could transform their conventional structure into a contemporary organisation by skilfully managing their resources and easing business processes. Some digitalised business processes include digital meeting scheduling, digital governance, live streaming on social media, online ordering, booking, delivery, tracking services and digital financial services (or mobile banking).

Recent studies have suggested that digitalising business processes promotes financial inclusion [[3], [4], [5]] and has a positive and significant effect on economic progress [4]. Digitalised business practices through technologically innovated business processes improved productivity and economic growth [1].

Digitalisation involves digital commercial techniques applied by firms, including digital financial services offered by financial intermediaries. Studies on digital financial inclusion assume that digital financial services provided by banks are inclusive [6,7] and accessible to all walks of life. Digitalised financial services that are inclusive will accelerate the banking stability of Indonesia, Malaysia, the Philippines and Thailand banks [6]. Still, it is uncertain if digital financial services are inclusive or if the digitalisation of business transactions triggers financial inclusion. Digitalised financial services do not always guarantee financial inclusion, especially for women [8] and underprivileged communities [9,10].

This study relaxed the digital financial inclusion assumption and hypothesised that digitalising business processes would bring about financial inclusion in lower-middle-income ASEAN countries. The hypothesis is motivated by the inconclusive findings on the impact of the digitalisation of business processes on financial inclusion.

The specific objective of this study is to determine the short and long-run effect of the digitalisation of business processes on the financial inclusion of lower-middle-income ASEAN countries. The Association of Southeast Asian Nations (ASEAN) is an economic alliance of ten member countries. The lower-middle-income ASEAN economies are Cambodia, Indonesia, Laos, Myanmar, the Philippines and Vietnam. The lower-middle-income ASEAN countries are identified based on the World Bank's gross national income (GNI) per capita calculation in U.S. dollars. Malaysia and Thailand are upper-middle-income ASEAN economies. Singapore and Brunei are classified as high-income economies.

This study's contribution is applying causal panel analysis of the digitalisation of business processes in lower-middle-income ASEAN economies. The application of the Diffusion of Innovation (DOI) theory highlighted the importance of digitalisation on financial inclusion as a catching-up factor for lower-middle-income ASEAN economies. The results complemented existing literature on how the digitalisation of business processes could enhance not only the financial inclusion of Group of Seven (G71) countries [1] and ASEAN-4 economies [11], but also lower-middle income ASEAN economies. The significance and positive impact of the digitalisation of business processes on financial inclusion imply that accessibility of private businesses to domestic credit provided by their banks improves financial inclusion in lower-middle-income ASEAN economies.

The following sections of this study reviewed recent literature on the digitalisation of business processes and financial inclusion, deliberated the application of DOI theory, discussed the economic background of lower-middle-income ASEAN economies, explained the methodology employed and illustrated the findings. This study ends with a discussion and some concluding remarks.

2. Literature review

Greater access to banking services promotes financial inclusion and contributes significantly and constructively to the resilience of financial institutions. Digitally inclusive financial services improve access to financial products, encourage household consumption, foster small and medium-sized entrepreneurial ventures [3] and alleviate poverty, especially in the rural area [12]. An inclusive financial system provides access to banking facilities, savings, and remittances to unbanked adults [5].

Financial inclusion is the result of users’ accessibility to financial services. The increase in mobile device users indicates a surge in digitally savvy consumers' usage of digitised services. These digitally savvy consumers prefer digital financial services over conventional banking services. Digitally and financially literate consumers promote financial inclusiveness and economic resilience [13]. Many researchers argue that digitalising business processes are associated with financial inclusion.

2.1. Digitalisation and financial inclusion

Digitalisation utilises digital infrastructures for real-time tracking and monitoring, social media sharing, water and wastewater management, energy and safety management [14]. It also involves transforming conventional business processes into the emerging trend of utilising digital capabilities to improve business performance [15]. The digitalisation of business processes can be measured based on digital technologies' supply and demand side. Information communication technologies (ICT) and infrastructure represent the supply side, while the adoption and usage represent the demand side of digitalisation [16]. Digitalisation includes business digitalisation where ICT used improved businesses’ financial performance [17]. This study will focus on the digitalisation of business processes on financial inclusion.

Digital financial services are part of the digitalisation process. The internet and extensive data know-how break through the geographical barriers between borrowers and financial intermediaries by reducing financing costs and creating digital opportunities to access financial services. Digital financial inclusion enables the accessibility of digitalised services, financial facilities [18] and e-commerce [12]. The rural, lower-income and deprived consumers were found to have a better chance to access financial services online.

From the banks' perspective, the digitalisation of business processes and digitised financial services are critical factors in increasing their reputation and value in providing financial intermediation [19]. The banks were able to reach out to remote customers and increase their market share in the financial system. A study on Indonesia, Malaysia, the Philippines and Thailand's banking systems proves that inclusive digitalised financial services will accelerate banking stability, reduce default risks and promote financial mobility [11]. Digital financial inclusion supports economic growth with a positive spill-over effect on neighbouring countries [20].

According to Myovella et al., 2020 [3], both the developed Organization for Economic Cooperation and Development (OECD) and the poorer Sub-Saharan Africa (SSA) countries are found to have a significant positive role in fostering economic activity through better information communication technologies. The poor housing and amenities of the lower-income SSA are compensated by financial accessibility from mobile banking and participation in small e-commerce online.

Some researchers argued that digitalisation obstructed financial inclusion. Digitalised financial services could not reach unbanked, digitally impaired, rural and poor households. Kanungo & Gupta, 2021 [10], reasoned that financial institutions could not reach out to the socially underprivileged community. Irrespective of gender, senior citizens in the poorer socio-economic community in India have minute knowledge of digital payment systems [8]. Most of their daily transactions involve cash. Thus, the digitalisation of financial services may not lead to financial inclusion and elevate the well-being of the underprivileged community. When financial services are digitalised, many disadvantaged communities can hardly afford small businesses' healthcare services, education, and funds [10].

The sustainable transformation of an urban city towards a digitalised city is directly linked to innovation and the digitalisation of the living environment. Digital urban governance, digital services and innovative live solutions are more sustainable, well-organised and attractive [21]. However, digitally driven urban city development might also cause a digital divide between socially vulnerable and poor communities.

The digitalisation of business processes is a double-edged sword. It improves financial inclusion and increases household financial distress [22]. Household with easier access to financial services means greater access to financing and credit facilities. Easier access to financing and credit facilities will increase households’ chances of falling into an unmanageable debt crisis. Digitalised financial services could benefit retail banks when they can acquire cheap retail deposits online. Larger banks, however, may exert competitive pressure on smaller banks, causing economic instability in the banking system [6].

This study further explores digitalisation's effect on financial inclusion through the Diffusion of Innovation (DOI) theory. The DOI theory describes the influence of digital technology diffusion over time [23].

2.2. Diffusion of Innovation (DOI)

The DOI theory explains the dispersion in using technologically aided business processes within a community or country, sometimes unintentionally [24]. In the context of the digitalisation of business processes, the DOI theory forms the primary extension of technological-based business transactions [25], supports technologically aided innovation in business processes and digitalised financial services [26], accelerates digitalisation and digital transformation [27]. Implementing digitalised business innovation enhanced businesses' values and increased customers’ user intentions [26]. The DOI theory asserts that innovative digitised services increase accessibility to government services, support investment growth, and strengthen the public and private sectors relationship [28].

This study applies the DOI theory to evaluate the influence of digitalisation of business processes, measured by the accessibility of digital services, subscription to cabled broadband data, pre-paid and post-paid mobile data, on financial inclusion. Based on the theoretical background of DOI, the hypothesis statements are specified as follows.

H1

There is a short-run causal effect of the digitalisation of business processes on financial inclusion in lower-middle-income ASEAN countries.

H2

Digitalising business processes has a long-run effect on financial inclusion in lower-middle-income ASEAN countries.

2.3. Lower-middle-income ASEAN countries

Financial technology and digitalised financial services improve rural consumption quality through the convenience of digital payments and e-commerce [12]. Rural households earned relatively lower incomes than those residing in urban areas. Six of ten ASEAN countries, Cambodia, Indonesia, Laos, Myanmar, the Philippines and Vietnam, are classified as lower-middle-income countries. Measured in billion USD, Indonesia's gross domestic product is the largest among the six countries, followed by the Philippines, Vietnam, Myanmar, Cambodia, and Laos. See Fig. 1 for details.

Fig. 1.

Annual GDP, 2000–2020 (measured in billion USD).

The economic structure of Myanmar and Laos has transformed from an agriculture-based economy to a more diversified manufacturing and service-based economy. The contribution of the service sector to the GDP of all the lower-middle-income economies has increased, except Cambodia. Cambodia's industrial sector's contribution to the GDP will be more significant than the service sector in 2020. See Fig. 2 for details.

Fig. 2.

Economic structure.

All six economies have been adversely affected by economic lockdown during the covid-19 pandemic, where their GDP plunged in 2020. Only Myanmar's GDP growth rate in 2020 indicates an upward trend compared to 2019. All other lower-middle-income ASEAN economies were still experiencing a low GDP growth rate for 2019–2020. See Fig. 3 for details.

Fig. 3.

Annual GDP growth rate, 2010–2020.

Many socio-economically poor adults in South Asia and Sub-Saharan Africa still lack access to formal financial services [13]. Financial inclusion is only available to resource-capable [29]. The unavailability of digital devices and financial literacy are barriers to financial inclusiveness and resilience.

Due to data limitations, studies on the financial inclusiveness of lower-middle-income ASEAN economies are lacking. The economic structure, size, and growth rates of all six lower-middle-income ASEAN economies differ substantially. The highlight of this study is to assess how the digitalisation of business processes might affect financial inclusion in these lower-middle-income ASEAN economies.

3. Methodology

Based on the DOI framework, the influence of digitalisation business processes on financial inclusion is estimated by employing the pooled mean group (PMG) estimation of the autoregressive distributed lag (ARDL) model introduced by Pesaran et al., 1999 [30]. Several recent researchers have employed the ARDL pooled estimation model [[31], [32], [33]] to determine the short and long-run relationship between the independent and dependent variables. It can determine the short and long-run relationship between variables regardless of the order of integration. The ARDL model is also a robust estimation technique for mixed stationarity of I(0) and I(1) data series, in a multivariate setting.

The ARDL is estimated in three stages. First, the unit root tests. All series are tested for unit root problems by applying the ADF-Fisher and PP-Fisher panel unit root tests. Second is the long-run cointegrating relationship, as stated in Equation (1).

$$Increment\Delta {Fin}_{it}={\gamma }_0+\sum _{j=1}^{\rho -1}{\gamma }_{1j}{\Delta Fin}_{it-j}+\sum _{j=0}^{q-1}{\gamma }_{2j}{\Delta LBB}_{it-j}+\sum _{j=0}^{q-1}{\gamma }_{3j}{\Delta MC}_{it-j}+{\beta }_{4i}{Fin}_{it-1}+{\beta }_{5i}L{BB}_{it-1}+{\beta }_{6i}{MC}_{it-1}+{\epsilon }_{it}$$ (1)

where ${\gamma }_s$ represent the coefficient matrix of the independent variables, $\rho$ and q represent the optimal leg length of the variables determined by the Akaike information criterion. The ${\epsilon i}_t$ is the error term.

Fin is financial inclusion, LBB is the log of fixed high-speed broadband subscriptions and MC is mobile and cellular subscriptions in Cambodia, Indonesia, Laos, Myanmar, the Philippines, and Vietnam. Financial inclusion is measured by converting the percentage of domestic credit to the private sector by banks to gross domestic product to its value in local currency. Due to data limitations for Laos, financial inclusion for Laos is proxied by the value of commercial banks and other lending measured in USD.

The LBB is the log of fixed high-speed broadband access that includes fixed-cabled or wireless broadband subscriptions for residential and commercial use. The MC mobile and cellular subscriptions measure the active post-paid and pre-paid mobile and data services. The hypothesises to test for the presence of a long-run relationship are stated as follows:-

$$H_0:{\gamma }_{1j}={\gamma }_{2j}={\gamma }_{3j}=0$$

$$H_1:{\gamma }_{1j}\ne {\gamma }_{2j}\ne {\gamma }_{3j}\ne 0$$

Third the short-run PMG vector error correction model (VECM) is estimated as presented in Equation (2).

$$\Delta {Fin}_{it}={\partial }_0+\sum _{j=1}^{\rho -1}{\partial }_{1j}{\Delta Fin}_{it-j}+\sum _{j=0}^{q-1}{\partial }_{2j}{\Delta LBB}_{it-j}+\sum _{j=0}^{q-1}{\partial }_{3j}{\Delta MC}_{it-j}+{\partial }_{5j}{ECM}_{it-1}+{\mu }_{it}$$ (2)

where ${\partial }_{5j}$ is the speed of adjustment coefficient and should be negative to indicate the short-run coefficients to equilibrium.

3.1. Findings

The panel unit root test is conducted to determine the stationarity of the time series and avoid spurious regression. The ADF-Fisher and PP-Fisher panel unit root tests are conducted to check for unit root problems for the time series used in the estimation model. Both unit root tests indicate that fixed high-speed broadband subscription (LBB) is I(0) for intercept and trend at a 1% level of significance; the mobile and cellular subscription (MC) is I(0) for intercept at a 5% level of significance. PP-Fisher indicates that Fin is I(1) for intercepts and intercepts and trends at a 5% significance level.

The mixed stationarity of I(0) and I(1) of the panel data series implied the inappropriate long panel estimation technique but ARDL estimation. See Table 1 for details.

Table 1.

Panel unit root.

	ADF - Fisher
	At Level		1st Difference
	Intercept	Intercept and trend	Intercept	Intercept and trend
Fin	8.0965	10.4586	19.5422*	17.8407
LBB	11.1684	36.6702***	36.1081***	19.0418*
MC	21.3482**	9.8549	23.0605**	20.6113*
PP - Fisher
Fin	7.6598	7.7781	28.7632***	22.5837**
LBB	11.1048	31.1852***	46.0494***	23.6395**
MC	26.2287**	7.9626	23.4399**	25.2336**

Notes: The *, ** and *** denote rejection of the null hypothesis of no unit root at 10%, 5%, and 1% levels. The lag for each variable is automatically selected based on the Akaike Information Criterion.

Equation (1) estimation results indicate a significant positive long-term effect of the fixed high-speed broadband subscription, the mobile and cellular subscription on the financial inclusion of the lower-middle-income ASEAN economies. However, the negative coefficient of ${ECM}_{t-1}$ indicates the speed of adjustment of the short-run coefficients to equilibrium and the t-statistics could not prove the outcome's significance. See Table 2 for details.

Table 2.

The short-run and long-run coefficients estimates.

Long Run Estimation	Coefficient	Std. Error	t-statistic	P-value
LBB	52451.43***	10090.4	5.1982	0.0001
MC	1016.56***	60.1286	16.9064	0.0001
Short Run Estimation
${ECM}_{t-1}$	−0.1141	0.0937	−1.2174	0.2318
Δ(Fin(-1))	0.2343	0.2943	0.7960	0.4315
Δ(MC)	5531.878	6240.423	0.8865	0.3816
Δ(MC(−1))	11030.3	13818.61	0.7982	0.4303
Δ(LBB)	−307.0117	247.7969	−1.2390	0.2238
Δ(LBB(−1))	−156.0857	129.7508	−1.2030	0.2373
C	−1663.272	2828.826	−0.5880	0.5604

Notes: The *** denotes rejection of the null hypothesis at the 1% level.

4. Discussion and research implication

The supply side of digital communication technologies and the demand side of digitalised transactions assess the digitalisation of business processes. The supply side of digitalised business transactions is proxied by fixed high-speed broadband, mobile and cellular subscriptions. The demand for digitalised transactions is denoted by financial inclusion, expressed as the bank's credit to domestic firms.

The research implication can be summarised in two folds. First, this study validates that the digitalisation of business transactions positively drives the financial inclusion of lower-middle-income ASEAN economies. The positive effect suggests digitalisation might be the catch-up factor for lower-middle-income ASEAN economies. This study supports the view that an inclusive financial system assures inclusive growth resulting from better institutional quality [6,34]. The sooner the lower-middle-income ASEAN economies catch up with the rest of the ASEAN countries, the quicker ASEAN can establish an integrated community. A compatible and integrated ASEAN are the pre-requisites to establishing an ASEAN Community1, 2 by 2025.

Second, the digitalisation of business processes constructively influences the accessibility of private businesses to domestic credit in the long run. There is no evidence that lower-income ASEAN economies might benefit from digitalising business processes in the short run.

Hence, it is recommended that policymakers intensify the utilisation of digital transactions of multiple financial tools, such as online banking and cashless payments. Cashless financial tools are crucial in developing an inclusive financial system [35] that promotes consumption and growth. A digitalised economy would demand a broader range of digital financial services that are accessible, affordable, inclusive and lessen income disparity [36].

As more business processes are digitalised, digital financial services can be extended to users based on their needs, social and economic status [37]. Promoting digital financial services could develop financial inclusion within and between ASEAN economies.

5. Conclusion

Recent studies argue that digitalising business processes support financial inclusion and trigger inclusive economic growth [1, 15]. Nonetheless, digital financial services are only sometimes inclusive, especially to unbanked and lower-income communities [9,10]. The digitalisation of commercial transactions has been found to induce financial inclusion in Cambodia, Indonesia, Laos, Myanmar, the Philippines, and Vietnam in the long run. But there is no significant evidence of the causal effect of digitalisation on the financial inclusion of lower-middle-income ASEAN.

This study is limited by the unavailability of data on utilising other financial tools. Data on the segregation of the impact of digitalisation of business processes on different clusters of household groups, rural versus urban and low versus high-income households are also inaccessible. Rural and lower-income households may need help accessing digital technology due to digital literacy and network connectivity issues. Future research might consider analysing the impact of digitalisation on a broader perspective of digital transformation when data is available.

Author contribution statement

Hway-Boon Ong: Conceived and designed the experiments; Performed the experiments; Analysed and interpreted the data; Wrote the paper.

Shaista Wasiuzzaman: Conceived and designed the experiments; Wrote the paper.

Lee-Lee Chong: Analysed and interpreted the data; Wrote the paper.

Shay-Wei Choon: Contributed reagents, materials, analysis tools or data; Wrote the paper.

Funding statement

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Data availability statement

Data included in article/supp. material/referenced in article.

Declaration of interest's statement

The authors declare no competing interests.