Institutional Quality and Access to Financial Services: Evidence from European Transition Economies

Purpose --This paper outlines an analytical framework for estimating households' access to formal credit across European transition economies shortly after the onset of the global financial crisis. This study considers along with the individual-level socio-economic and demographic characteristics also the perceived quality of the institutions. We want to assess whether an adequate policy-level intervention to promote financial inclusion should account for the individuals' subjective evaluation of the political situation in their own country as well as their personal experience of corruption. Design/methodology/approach --This paper identifies the main determinants of financial inclusion using European microdata (LiTS II). In order to estimate individuals' access to formal financial markets, we construct a bivariate probit model to account for joint access to short-term and long-term credit products (Mohieldin and Wright, 2000). Findings --The results show that improving people's access to financial markets across European regions requires a set of interventions at the institutional and local levels to link-up policies of financial inclusion and financial integrity. Originality/value --The paper contributes to the existing literature by identifying a number of key causes of financial inclusion and how institutional quality (corruption crimes) may affect the levels of financial access in a country.