WHEN DOES FINANCIAL INCLUSION REDUCE POVERTY? MODERATING ROLE OF INEQUALITY AND INSTITUTIONS IN DEVELOPING COUNTRIES

Abstract

Access to formal finance has spread quickly across developing countries since 2000, but poverty has fallen at very different speeds from one country to the next. This study asks whether the poverty payoff of financial inclusion depends on the economic and social conditions into which it arrives. We use an unbalanced panel of 36 developing countries for 2000-2025, build a financial inclusion index from six IMF Financial Access Survey indicators through principal component analysis, and estimate dynamic poverty models with one-step and two-step difference and system GMM. Financial inclusion lowers both the US$3 and the US$4.20 a day poverty headcount in all specifications. In the two-step system GMM the coefficients are -3.218 for extreme poverty and -3.476 for moderate poverty. Poverty is very persistent, with coefficients on lagged poverty between 0.884 and 1.052. Interaction models show that income inequality, wealth concentration and gender inequality weaken the poverty-reducing effect of financial inclusion while institutional quality and secondary school enrolment strengthen it. At the sample mean Gini of 41.7, the marginal effect of the index on extreme poverty is -2.148, and it shrinks by about 0.41 for every 10-point rise in the Gini. Expanding bank accounts and credit will do most for the poor where it goes together with redistribution, gender-inclusive reform, better governance and wider schooling.