Financial Inclusion, Poverty, and Income Inequality

Abstract

This paper extends the existing literature on financial inclusion by analyzing the factors affecting financial inclusion and assessing the impact of financial inclusion on poverty and income inequality in the world and Asia. We construct a new financial inclusion indicators to assess various macroeconomic and country-specific factors affecting the degree of financial inclusion for 176 economies, including 37 of which from developing Asia. We test the impact of financial inclusion, along with other control variables, on poverty and income inequality. We do so for full sample of countries and then for developing Asia sample to access which factors are relevant for full sample and for developing Asia specifically. The estimation results show that per capita income, rule of law, and demographic characteristics significantly affect financial inclusion for both world and Asia samples. However, primary education completion and literacy significantly increases financial inclusion only in the full sample, not for the Asian sample. The findings also indicate that financial inclusion is significantly correlated with lower poverty and income inequality levels for the full sample. For developing Asia, however, there appears to be no link between financial inclusion and income inequality.

The effect of basic public service on urban-rural income inequality: a sys-GMM approach

“…In addition, the effects of the control variables on the urban-rural income gap in Tables 4 and 5 have the same directions with the findings of the existing studies (e.g., Huang & Zhang, 2019;Park & Mercado, 2018;Wu & Rao, 2017). Specifically, urbanisation level, agricultural expenditure and financial development are conductive to narrowing the income gap.…”

A theory of financial inclusion and income inequality

“…This literature has thus far been dominated by cross-country studies. Most of them point to a negative relationship between financial inclusion and inequality (Honohan 2008;Mookerjee and Kalipioni 2010;Kim 2016;Neaime and Gaysset 2018;Turégano and Herrero 2018) but their findings differ across regions and countries (Park and Mercado 2018;Dabla-Norris et al 2020). For instance, Mookerjee and Kalipioni (2010), as well as Neaime and Gaysset (2018), find that increasing access to financial services, through bank branches results in a less unequal income distribution.…”

“…Similarly, findings by Aslan et al (2017) show that increasing the intensity of use of financial services 3 leads to a reduction in income inequality. However, a more recent study by Park and Mercado (2018) finds that increasing the accessibility, availability and usage of financial services 4 tends to reduce income inequality, except in developing Asia (including China and India).…”

“…4. These various dimensions of financial inclusion are measured by: the number of automated teller machines and commercial bank branches per 100,000 adults; the number of borrowers from, and depositors with, commercial banks per 1,000 adults; and the ratio of domestic credit to GDP (Park and Mercado 2018). 5.…”

“…While most cross-country studies have found a negative relationship between financial inclusion and income inequality (Honohan 2008;Mookerjee and Kalipioni 2010;Kim 2016;Neaime and Gaysset 2018;Turégano and Herrero 2018), it is unclear whether these findings hold for Asia, in general, and China, in particular (Park and Mercado 2018). Furthermore, these studies have not investigated the mechanisms or processes underlying the relationship between financial inclusion and inequality, nor have they examined whether the effects of financial inclusion vary across different financial services.…”