The Influence of Financial Inclusion on Stock Market Participation in Nepal: Exploring the Mediating Effect of Financial Knowledge

Purna Man Shrestha; Mahesh Rana

doi:10.58421/misro.v3i3.304

DOI:

https://doi.org/10.58421/misro.v3i3.304

Authors

Purna Man Shrestha Mid-West University https://orcid.org/0000-0001-5785-0135
Mahesh Rana Surkhet Model College

Keywords:

Financial inclusion, Financial knowledge, Nepal Stock Exchange, Stock market participation, Structural Equation Modeling

Abstract

This paper focuses on financial inclusion (FI), a fast-embracing topic with potential drivers of economic growth and the improvement of individual financial well-being. This study contributes to the existing literature by analysing how financial inclusion influences stock market participation (SMP) in Nepal, explicitly emphasising the intermediary role of economic knowledge. The study employed a causal-comparative research design, and the data were collected from 403 individual investors actively participating in the Nepal Stock Exchange (NEPSE) trading. The statistical tools used to meet the objectives of this research are descriptive statistics, factor analysis, and structure equation modelling. The study results show that FI and knowledge influence individual investor participation in the stock market. The result also indicates that FI is positively related to stock market activity, while it is essential to enhance citizens' FK significantly. Further, mediation analysis shows that FK partially mediates the relationship between FI and SMP. This suggests its pivotal role in narrowing the gap between access to financial services and actual investment behaviour. These findings underscore the critical role of FI in creating an inclusive and participatory financial ecosystem within Nepal. Longitudinal data in future research can capture the evolving dynamics of FI and its long-term impact on SMP.

Downloads

Download data is not yet available.

References

B. Pant, “Promoting Financial Inclusion in Nepal: Policy Assessment and Priorities,” NRB Work. Pap., no. 34, 2016.

T. Beck, A. Demirgüç-Kunt, and R. Levine, “Finance, inequality and the poor,” J. Econ. Growth, vol. 12, no. 1, pp. 27–49, Mar. 2007, doi: 10.1007/s10887-007-9010-6.

A. Demirguc-Kunt, L. Klapper, D. Singer, and S. Ansar, The Global Findex Database 2021: Financial Inclusion, Digital Payments, and Resilience in the Age of COVID-19. The World Bank, 2018. doi: 10.1596/978-1-4648-1897-4.

K. Ratnawati, “The impact of financial inclusion on economic growth, poverty, income inequality, and financial stability in asia,” J. Asian Finance Econ. Bus., vol. 7, no. 10, pp. 73–85, Oct. 2020, doi: 10.13106/JAFEB.2020.VOL7.NO10.073.

R. Huang, S. Kale, S. R. Paramati, and F. Taghizadeh-Hesary, “The nexus between financial inclusion and economic development: Comparison of old and new EU member countries,” Econ. Anal. policy, vol. 69, pp. 1–15, Mar. 2021, doi: 10.1016/j.eap.2020.10.007.

S. Suwaji and A. Agustedi, “The influence of financial literacy and financial inclusion on investment decisions and business performance,” Int. Conf. Bus. Soc. Sci., vol. 3, no. 1, pp. 368–379, 2023, doi: 10.24034/icobuss.v3i1.381.

A. Akpene Akakpo, M. Amidu, W. Coffie, and J. Y. Abor, “Financial literacy, financial inclusion and participation of individual on the Ghana stock market,” Cogent Econ. Finance, vol. 10, no. 1, p. 2023955, Dec. 2022, doi: 10.1080/23322039.2021.2023955.

D.-W. Kim, J.-S. Yu, and M. K. Hassan, “Financial inclusion and economic growth in OIC countries,” Res. Int. Bus. Finance, vol. 43, pp. 1–14, Jan. 2018, doi: 10.1016/j.ribaf.2017.07.178.

P. K. Shrestha, “Changing Dimension of Financial Inclusion in Nepal: A Comparative Analysis,” NRB Work. Pap., no. 50, 2020.

B. R. Dhungana, R. Chapagain, B. Karmacharya, O. P. Pokhrel, and L. K. Sharma, “Impact of financial inclusion on monetary policy effectiveness in Nepal,” Pac. Bus. Rev. Int., vol. 16, no. 2, pp. 1–11, 2023.

M. Čihák, A. Demirgüç-Kunt, E. Feyen, and R. Levine, “Benchmarking Financial Systems around the World,” World Bank Policy Res. Work. Pap. No 6088, 2012.

N. Terzi, “Financial inclusion and Turkey,” Acad. J. Interdiscip. Stud., vol. 4, no. 1, pp. 269–276, Apr. 2015, doi: 10.5901/ajis.2015.v4n1s2p269.

M. H. Giang, B. H. Trung, Y. Yoshida, T. D. Xuan, and M. T. Que, “The causal effect of access to finance on productivity of small and medium enterprises in Vietnam,” Sustainability, vol. 11, no. 19, pp. 1–19, Oct. 2019, doi: 10.3390/su11195451.

J. C. Ozigbu and C. Ifeanyi, “Financial deepening process and dynamics of economic development in Nigeria,” Am. J. Humanit. Soc. Sci. Res. AJHSSR, vol. 4, no. 12, pp. 105–112, 2020.

M. M. Ahamed and S. K. Mallick, “Is financial inclusion good for bank stability? International evidence,” J. Econ. Behav. Organ., vol. 157, pp. 403–427, Jan. 2019, doi: 10.1016/j.jebo.2017.07.027.

B. D. Saraswati, G. Maski, D. Kaluge, and R. K. Sakti, “The effect of financial inclusion and financial technology on effectiveness of the indonesian monetary policy,” Bus. Theory Pract., vol. 21, no. 1, pp. 230–243, Mar. 2020, doi: 10.3846/btp.2020.10396.

E. B. Anarfo, J. Y. Abor, and K. A. Osei, “Financial regulation and financial inclusion in Sub-Saharan Africa: Does financial stability play a moderating role?,” Res. Int. Bus. Finance, vol. 51, p. 101070, Jan. 2020, doi: 10.1016/j.ribaf.2019.101070.

M. Amidu, J. Y. Abor, W. Coffie, and A. A. Akakpo, “Financial inclusion, livelihood activities, and stock market participation,” Emerg. Econ. Stud., vol. 7, no. 1, pp. 23–61, May 2021, doi: 10.1177/23949015211057924.

J. Ofosu-Mensah Ababio, E. B. Yiadom, E. Sarpong-Kumankoma, and I. Boadi, “Financial inclusion: a catalyst for financial system development in emerging and frontier markets,” J. Financ. Econ. Policy, vol. 15, no. 6, pp. 530–550, Nov. 2023, doi: 10.1108/JFEP-06-2023-0155.

D. Mishra, V. Kandpal, N. Agarwal, and B. Srivastava, “Financial inclusion and its ripple effects on socioeconomic development: a comprehensive review,” J. Risk Financ. Manag., vol. 17, no. 3, p. 105, Mar. 2024, doi: 10.3390/jrfm17030105.

A. Lusardi and O. S. Mitchell, “The Economic Importance of Financial Literacy: Theory and Evidence,” J. Econ. Lit., vol. 52, no. 1, pp. 5–44, Mar. 2014, doi: 10.1257/jel.52.1.5.

M. Van Rooij, A. Lusardi, and R. Alessie, “Financial literacy and stock market participation,” J. Financ. Econ., vol. 101, no. 2, pp. 449–472, Aug. 2011, doi: 10.1016/j.jfineco.2011.03.006.

J. S. Hastings, B. C. Madrian, and W. L. Skimmyhorn, “Financial literacy, financial education, and economic outcomes,” Annu. Rev. Econ., vol. 5, no. 1, pp. 347–373, Aug. 2013, doi: 10.1146/annurev-economics-082312-125807.

L. Mandell and L. S. Klein, “The impact of financial literacy education on subsequent financial behavior,” vol. 20, no. 1, pp. 15–24, 2009.

D. P. Subedi, “Financial literacy and investment decisions in nepalese share market,” Manag. Dyn., vol. 26, no. 1, pp. 11–20, Oct. 2023, doi: 10.3126/md.v26i1.59147.

S. K. Shrestha, B. Manandhar, P. Bhattarai, and N. Shrestha, “Impact of financial literacy on personal investment decisions in Kathmandu valley,” Intell. J. Multidiscip. Res., vol. 2, no. 1, pp. 25–34, Mar. 2023, doi: 10.3126/ijmr.v2i1.53618.

A. Demirguc-Kunt and L. Klapper, Financial Inclusion in Africa: An Overview. in Policy Research Working Papers. The World Bank, 2012. doi: 10.1596/1813-9450-6088.

F. Allen, A. Demirguc-Kunt, L. Klapper, and M. S. Martinez Peria, “The foundations of financial inclusion: Understanding ownership and use of formal accounts,” J. Financ. Intermediation, vol. 27, pp. 1–30, Jul. 2016, doi: 10.1016/j.jfi.2015.12.003.

S. Agarwal, G. Amromin, I. Ben-David, S. Chomsisengphet, and D. D. Evanoff, “Financial literacy and financial planning: Evidence from India,” J. Hous. Econ., vol. 27, pp. 4–21, Mar. 2015, doi: 10.1016/j.jhe.2015.02.003.

H. Chen and R. P. Volpe, “An analysis of personal financial literacy among college students,” Financ. Serv. Rev., vol. 7, no. 2, pp. 107–128, Jun. 1998, doi: 10.1016/S1057-0810(99)80006-7.

D. Fernandes, J. G. Lynch, and R. G. Netemeyer, “Financial literacy, financial education, and downstream financial behaviors,” Manag. Sci., vol. 60, no. 8, pp. 1861–1883, Aug. 2014, doi: 10.1287/mnsc.2013.1849.

A. Hung, A. M. Parker, and J. Yoong, “Defining and measuring financial literacy,” SSRN Electron. J., 2009, doi: 10.2139/ssrn.1498674.

W. G. Cochran, Sampling techniques. John Wiley & Sons, 1977.

N. K. Bowen and S. Guo, Structural Equation Modeling. Oxford University Press, 2011. doi: 10.1093/acprof:oso/9780195367621.001.0001.

J. C. Nunnally, Psychometric Theory, Second. McGraw-Hill., 1978.

J. Nunnally and I. Bernstein, Psychometric Theory, Third. New York: MacGraw-Hill, 1994.

J. F. Hair, W. C. Black, B. J. Babin, and R. E. Anderson, Multivariate Data Analysis, Seventh. Pearson Prentice Hall, 2010.

C. Fornell and D. F. Larcker, “Evaluating structural equation models with unobservable variables and measurement error,” J. Mark. Res., vol. 18, no. 1, pp. 39–50, Feb. 1981, doi: 10.2307/3151312.

P. M. Bentler, “Comparative fit indexes in structural models.,” Psychol. Bull., vol. 107, no. 2, pp. 238–246, 1990, doi: 10.1037/0033-2909.107.2.238.

L. Hu and P. M. Bentler, “Fit indices in covariance structure modeling: sensitivity to underparameterized model misspecification,” vol. 3, no. 4, pp. 424–453, 1998.

A. Akpene Akakpo, M. Amidu, W. Coffie, and J. Y. Abor, “Financial literacy, financial inclusion and participation of individual on the Ghana stock market,” Cogent Econ. Finance, vol. 10, no. 1, p. 2023955, Dec. 2022, doi: 10.1080/23322039.2021.2023955.