Spatial Interdependence and Competitive Crowding-Out of Financial Inclusion in Asia Pacific Region

Abstract

The Asia-Pacific region, despite being the world's fastest-growing economy, exhibits pronounced spatial and temporal heterogeneity in financial inclusion (FII). Existing studies tend to assume national independence, thereby overlooking crucial cross-border spatial dynamics. This study investigates the factors affecting FII across a panel of 19 Asia-Pacific countries from 2004 to 2022 using the spatial lag model (SLM) and the spatial error model (SEM), as well as the impact decomposition. Diagnostics confirm time-varying spatial autocorrelation in FII, often characterised by negative divergence in recent years. The spatial impact decomposition reveals that while domestic income growth yields a strong direct impact on local FII, this benefit is significantly offset by a negative indirect spillover to neighbouring countries. This finding confirms a pattern of competitive crowding-out, where financial development in a successful hub draws resources, or capital, away from adjacent markets. Furthermore, the frequent selection of the spatial error model indicates that spatially correlated unobserved institutional and socio-cultural factors (latent spatial heterogeneity) are major drivers of regional FII clustering, particularly concerning income, age. gender and regulatory variables. Policy interventions must evolve from national efforts to coordinated, place-based regional strategies that mitigate competitive displacement and harmonise institutional frameworks to address persistent exclusion among female and ageing populations.