A Non‐Linear Analysis of Financial Inclusion and Carbon Intensity in Sub‐Saharan Africa

ABSTRACT

This study provides novel empirical evidence on the non‐linear relationship between financial inclusion (FI) and carbon intensity (CI) in Sub‐Saharan Africa (SSA), analyzing panel data from 35 countries between 2000 and 2022. Grounded in the Environmental Kuznets Curve and Ecological Modernization Theory, the findings reveal a robust inverted U‐shaped pattern: at early stages, expanding FI leads to increased carbon intensity due to credit‐driven economic growth and energy use, while beyond a critical threshold, further FI development facilitates reductions in carbon emissions through improved access to green technologies and sustainable finance. This dual effect varies by country characteristics, with the turning point more pronounced in low‐income, low‐growth nations. The study employs a multi‐method approach including fixed‐effects, System GMM, DCCE‐MG, and Augmented Mean Group estimators, with multiple robustness checks, to account for endogeneity, cross‐sectional dependence, and cross‐country heterogeneity. Policy implications emphasize the need for stage‐sensitive strategies that integrate environmental incentives into financial systems, such as green credit and tax relief, to harness FI's potential for sustainable development in SSA. By focusing on the FI‐environment nexus in an African context, this research fills a critical gap and offers actionable insights for aligning financial inclusion with climate goals.