Effect of Financial Inclusion on Poverty and Vulnerability to Poverty: Evidence Using a Multi-Dimensional Measure of Financial Inclusion

Abstract

This study examines the effect of financial inclusion on poverty and vulnerability to poverty of Ghanaian households. Using data extracted from the seventh round of the Ghana Living Standards Survey in 2016/17, a multiple correspondence analysis is employed to generate a financial inclusion index, and three-stage feasible least squares is used to estimate households’ vulnerability to poverty. Endogeneity associated with financial inclusion is resolved using distance to the nearest bank as an instrument in an instrumental variables probit technique. Results showed that while 23.4 percent of Ghanaians are considered poor, about 51 percent are vulnerable to poverty. We found that an increase in financial inclusion has two effects on household poverty. First, it is associated with a decline in a household’s likelihood of being poor by 27 percent. Second, it prevents a household’s exposure to future poverty by 28 percent. Female-headed households have a greater chance of experiencing a larger reduction in poverty and vulnerability to poverty through enhanced financial inclusion than do male-headed households. Furthermore, financial inclusion reduces poverty and vulnerability to poverty more in rural than in urban areas. Governments are encouraged to design or enhance policies that provide an enabling environment for the private sector to innovate and expand financial services to more distant places. Government investment in, and regulation of, the mobile money industry will be a necessary step to enhancing financial inclusion in developing countries.