The Contribution of Financial Inclusion in Reducing Poverty and Income Inequality in Developing Countries

Abstract

This study employed three different dynamic panel data estimators to empirically examine the effect of financial inclusion on poverty and income inequality for a sample of 53 developing countries between 2004 and 2017. The findings revealed a negative relationship between financial inclusion and poverty; within which availability of credit and access to deposit accounts at commercial banks tend to significantly alleviate poverty. These results support the idea that financial access, as well as financial development, contribute to reducing poverty by increasing the money supply or credit and improving the welfare of the poor. Furthermore, it was concluded that a high bank penetration rate and credit facilitate access to financial services for the poor and reduce income inequality. This result was corroborated by the bias-corrected fixed effects estimator at significance levels of 5% and 1%, respectively. Those proxy variables for financial inclusion that exert no significant effects could be explained by weak financial institutional structures, plus the need to incorporate elements of financial inclusion into a stronger framework, which would exert an effective impact on poverty and income inequality.