Abstract
Financial inclusion is a key element of social inclusion, particularly useful in combating poverty and income inequality by opening blocked advancement opportunities for disadvantaged segments of the population. This study intends to investigate the impact of financial inclusion on reducing poverty and income inequality, and the determinants and conditional effects thereof in 116 developing countries. The analysis is carried out using an unbalanced annual panel data for the period of 2004–2016. For this purpose, we construct a novel index of financial inclusion using a broad set of financial sector outreach indicators, finding that per capita income, ratio of internet users, age dependency ratio, inflation, and income inequality significantly influence the level of financial inclusion in developing countries. Furthermore, the results provide robust evidence that financial inclusion significantly reduces poverty rates and income inequality in developing countries. The findings are in favor of further promoting access to and usage of formal financial services by marginalized segments of the population in order to maximize society’s overall welfare.
Highlights
Financial inclusion connotes all initiatives that make formal financial services accessible and affordable, primarily to low-income people
This study finds that per capita real GDP and ratio of internet users positively influence the level of financial inclusion in developing countries, while age dependency ratio, inflation, and income inequality have a detrimental effect
Our results show robust evidence that economies with higher financial inclusion significantly reduce poverty rates and income inequality in developing countries
Summary
Financial inclusion connotes all initiatives that make formal financial services accessible and affordable, primarily to low-income people. The emergence of financial inclusion promotes social inclusion through convenient access, availability, Omar and Inaba Economic Structures (2020) 9:37 and usage of rules-based formal financial services by the “newly banked”. These are generally underprivileged population segments, vulnerable groups such as rural dwellers, women, and low-income families who benefit enormously from basic financial services like savings, borrowings, payment, and insurance (World Bank 2014). Financial inclusion helps to fill these gaps and provide households and firms greater access to resources needed for finance consumption and investment and thereby raise the level of economic activity. Financial inclusion makes growth inclusive: access to finance can enable economic agents to take part in long-term participatory investment activities, facilitate efficient allocation of productive resources and reduce the cost of capital, cope with unexpected short-term shocks, significantly improve day-to-day management of finances, and reduce usually exploitative informal sources of credit (Demirgüç-Kunt et al 2015, 2018)
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