The Impact of Financial Inclusion on Poverty in Low-and Middle-Income Countries.

Abstract

The purpose of the study is to investigate the effects of financial inclusion on poverty in lowand middle-income countries. It contributes to the existing literature by 1) developing a financial inclusion measure which uses available cross-country data, 2) focusing on low- and middle-income countries specifically and 3) understanding the link between financial inclusion and poverty in low- and middle-income countries. A large body of economic literature supports the view that through the availability of finance, investments can be made that increase the productivity of an individual or an enterprise which in turn promotes growth. One can apply this concept also on the very poor who can increase their income through investing in a small business. The financial inclusion index of this paper contains both the access to as well as the usage of financial products. The empirical analysis focuses on the impact of financial inclusion, along with other control variables, on different measures of poverty. The results using the fixed effects estimation show that financial inclusion has an alleviating effect on poverty in low- and lower middle-income countries. The absolute reduction in the poverty headcount ratio of 5,50 USD per day is greater than the one at 1,90 USD per day. The negative effect of financial inclusion on poverty holds true under different robustness checks. It is therefore recommended to encourage financial inclusion through policies and a sound regulatory framework, in order to give the very poor the opportunity to invest in productive business ideas and grow their own businesses. Also, the range of financial products should be broadened to meet the specific needs of the clients, which may be special savings, loans or insurance products. The empirical results also reveal other determinants which have an alleviating effect on poverty. Especially education, internet access and trade openness have a significant negative effect on the different poverty measures. Contrary to the endogenous growth theory, external factors, such as net official development aid, also affect the poverty measures.