The Impact of Financial Inclusion on Poverty Reduction

Abstract

Abstract Poverty is a global issue and a lot of attention and efforts of the international community have been made to deal with this problem. Especially in the context of the COVID-19 pandemic, when a part of the population could fall into poverty due to rising unemployment and income deduction, identifying the factors affecting poverty becomes particularly important. Financial inclusion has been recognized as one important factor affecting poverty reduction. This research is conducted to investigate the impact of financial inclusion and other control variables on poverty reduction. The study employs Principal Component Analysis (PCA) to build a financial inclusion index. Using 2SLS and the GMM regressions for a panel data of 29 European countries during the period from 2011 to 2017, the results show that financial inclusion has a negative impact on poverty at all three poverty lines of USD1.9, 3.2, and 5.5 per day. The proportion of the population aged 15–64 and the ratio of service employment to the total number of employment also have a negative effect on all three levels of POV1.9, POV3.2, and POV5.5. In contrast, GDP per capita, trade openness and the proportion of the population aged from 25 with at least secondary school education have a positive impact on poverty at three levels of poverty. The results confirm that financial inclusion plays an important role in reducing poverty. The study provides a number of recommendations to governments to promote financial inclusion and reduce poverty in the countries.