Financial inclusion matter for poverty, income inequality and financial stability in developing countries: new evidence from public good theory

Abstract

PurposeThis paper aims to examine the influence of financial inclusion (FI) on poverty, income inequality and financial stability from the perspective of public good (PG) theory in developing countries.Design/methodology/approachThis study applies the fixed effects model (FEM), pooled ordinary least square (OLS) regression and generalized method of moment (GMM) across panal data of 69 developing countries from 2002 to 2020 inclusive.FindingsMultiple regression analyses show that FI reduces poverty and income inequality while improving financial stability. Secondary enrolment ratio, GDP per capita, and trade openness reduce poverty and income inequality. However, a higher inflation rate increases poverty and income inequality while reducing financial stability. Finally, age dependency ratio and population do not affect poverty, income inequality or financial stability.Research limitations/implicationsThe regulators and policymakers in developing countries should raise the level of formal FI by expanding the size of the formal financial sector and improving the access of the large unbanked population to financial products/services. Improving FI enables the unbanked population to take over productive activities and ease consumption, which in turn complementing economic growth.Social implicationsThe increase in FI enables the developing countries to include the financially excluded population through formal financial products and services, which improve financial stability and eradicate poverty and income inequality in society. Thus, the FI enhances the social welfare of society.Originality/valueThis is the first study that examines the impact of FI poverty, income inequality and financial stability in the context of developing countries. This study contributes to the theoretical implications of the PG theory by examining the influence of FI on poverty, income inequality and financial stability in the context of developing countries.