Financial Inclusion and Growth Under Banking Fragility: Dynamic Panel Evidence from Latin America

Financial inclusion is expected to raise long-run income, yet the banks that deliver it in Latin America carry recurrent asset-quality problems. This study asks whether the usage of formal financial services is associated with higher income per capita in the region and whether banking fragility alters that association. A usage-based financial inclusion index was built from deposit accounts, loan accounts and private credit for 12 Latin American economies over 2004–2024 and externally compared with Global Findex account ownership. Dynamic fixed effects (DFE), mean group and common correlated effects estimators were compared. The panel cointegration tests do not reject the null of no cointegration, and the significance of the error-correction term under standard critical values does not overturn that result, so the long-run estimates are read as conditional level associations. The index has positive DFE coefficients between 0.0059 and 0.0097 per index point, but the association is not robust: it is insignificant in most mean group estimates, vanishes once common time effects are absorbed, and income Granger-causes inclusion rather than the reverse. The non-performing loan ratio is negative in most estimates but significant only in some specifications, and the moderating role of fragility is not supported.