IMPACT OF FINANCIAL INCLUSION AND ENERGY CONSUMPTION ON ENVIRONMENTAL QUALITY IN SELECTED SUB-SAHARAN AFRICAN COUNTRIES

Abstract

Sub-Saharan Africa (SSA) faces a pressing development dilemma: rising energy demand, weak financial inclusion, and worsening environmental degradation. The region’s reliance on fossil fuels such as coal, gas, and oil has intensified carbon emissions and undermined environmental sustainability, while the exclusion of a significant share of the population from formal financial systems constrains their ability to invest in clean energy and sustainable practices. Despite growing global advocacy for inclusive finance and clean energy adoption, existing research provides limited evidence on how financial inclusion moderates the energy–environment nexus, particularly within SSA. Furthermore, the potential influence of structural breaks—such as global financial crises, international climate agreements, and pandemics—on this relationship remains underexplored. These gaps informed the motivation for this study. This research examined the impact of financial inclusion on the relationship between energy consumption and environmental quality across 38 low- and middle-income SSA countries between 1991 and 2022. Anchored on the Environmental Kuznets Curve (EKC) hypothesis, the study employed annual secondary data sourced from the World Bank’s World Development Indicators. The Cross-Sectional Autoregressive Distributed Lag (CS-ARDL) model was the principal estimation technique, as it accounts for cross-sectional dependence and heterogeneity while capturing both short- and longrun dynamics. To ensure robustness, the Pooled Mean Group (PMG) estimator was also applied. The empirical results show that energy consumption significantly worsens environmental quality across the region, with middle-income countries exhibiting a stronger positive association between energy use, capital investment, and carbon emissions. Real GDP and gross capital investment further contributed to emissions, reflecting the industrial expansion of African economies. In contrast, the quality of environmental regulation was negatively associated with emissions, indicating its mitigating role, though implementation remains uneven across countries. Financial inclusion was found to be a critical determinant of environmental outcomes: in middle-income economies, greater inclusion significantly reduced emissions by enabling access to credit, green finance, and adoption of cleaner technologies. However, in low-income countries, the short-term effects of financial inclusion on environmental quality were positive but statistically insignificant, reflecting structural constraints in their financial systems. The study concludes that financial inclusion can serve as a viable policy instrument for environmental sustainability in SSA. Expanding inclusive finance, strengthening regulatory enforcement, and aligning financial innovations with Nationally Determined Contributions (NDCs), the Sustainable Development Goals (SDGs), and Africa’s Agenda 2063 are vital for promoting clean energy adoption and building climate-resilient economies.