The moderating role of financial literacy in strengthening the effect of financial inclusion on economic growth: A system GMM approach to provincial panel data in Indonesia, 2016–2024

Abstract

Background: Financial inclusion is widely believed to foster growth through savings mobilisation and expanded financing, but its benefits are thought to depend on financial literacy. In Indonesia, inclusion has grown faster (80.51% in 2025) than literacy (66.46%), a gap of roughly 14 points. Prior studies mostly examine these variables separately, rarely treat literacy as a moderator, and often neglect endogeneity and growth dynamics. This study analyses the moderating role of literacy in the inclusion–growth nexus. Methods: This quantitative study uses secondary panel data for 34 Indonesian provinces over 2016–2024 (N = 306) from OJK, BPS, and Bank Indonesia. The dependent variable is economic growth (real GRDP); independent variables are the financial inclusion index (FI) and literacy index (FL), with the FI×FL interaction as moderator, and HDI, poverty, unemployment, and investment as controls. The primary estimator is two-step System GMM, benchmarked against Fixed Effects and Difference GMM, with diagnostics confirming instrument validity and no second-order serial correlation. Findings: Both inclusion and literacy positively affect growth. The FI×FL interaction is consistently positive across estimators (Fixed Effects β = 0.0066, p < 0.01; Difference GMM β = 0.0077, p < 0.05; System GMM β = 0.0089), showing literacy strengthens inclusion's growth effect, rising monotonically from negative to substantially positive. Conclusion: Expanding access yields a larger growth dividend when paired with adequate literacy; policy should integrate financial education. Novelty/Originality of this article: This study combines a literacy-moderation framework with a dynamic System GMM panel for 34 provinces, addressing endogeneity, bidirectional causality, and growth persistence.