From Financial Exclusion to Informal Debt: The Mediating Role of Financial Inclusion

Abstract

Purpose – This study aims to examine the influence of financial exclusion and distance to bank on informal debt dependence, while investigating the role of financial inclusion in shaping these relationships among communities in Central Java, Indonesia Design/methodology/approach – This study employed a quantitative explanatory research design using primary data collected through an online questionnaire from 200 respondents residing in Central Java who had experience using formal or informal borrowing. The data were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS 4.0. The analysis included measurement model assessment, structural model evaluation, and bootstrapping for hypothesis testing Findings – The results show that distance to bank and financial exclusion have positive and significant effects on informal debt dependence. Financial inclusion also has a positive and significant relationship with informal debt dependence, indicating that formal and informal financing may coexist rather than function solely as substitutes. Furthermore, financial inclusion significantly weakens the positive relationship between distance to bank and informal debt dependence. However, its moderating effect on the relationship between financial exclusion and informal debt dependence is not significant. Research limitations/implications – The study is limited by its cross-sectional design and geographical focus on Central Java. Future research may incorporate financial literacy, financial resilience, digital financial inclusion, income, and behavioral factors. Originality/value – This study extends the financial inclusion literature by integrating geographical barriers, financial exclusion, and financial inclusion to explain informal debt dependence, while positioning financial inclusion as a moderating mechanism rather than merely an independent predictor.