The Effect of Institutional Quality and ICT on Financial Inclusion: Evidence from OIC Countries

Abstract

This study explores how institutional quality and ICT influence financial inclusion in OIC countries. This setting is particularly relevant because many member states show relatively low levels of financial inclusion and face significant disparities in institutional capacity, digital infrastructure, and financial system development. Using panel data for 20 OIC countries from 2016 to 2023, the study constructs composite indices of financial inclusion, institutional quality, and ICT through Principal Component Analysis and estimates a random-effects model selected through the Chow, Hausman, and Lagrange multiplier tests. The results show that institutional quality has a positive and significant effect on financial inclusion, whereas ICT has no significant direct effect. Unemployment reduces financial inclusion, while financial deepening improves it. The interaction between institutional quality and ICT is negative and significant, indicating a weakening or substitution effect: institutional improvements do not automatically amplify ICT benefits and may reduce ICT’s marginal contribution when regulation, interoperability, consumer protection, digital literacy, and market readiness remain insufficiently aligned. The study contributes by jointly testing the direct and interaction effects of institutional quality and ICT using multidimensional indices in the underexamined OIC context. These findings support integrated institutional and digital reforms rather than ICT expansion as a standalone strategy.