Assessing the Effects of Financial Inclusion on Reducing Poverty and Income Inequality in South Asia: Evidence from a CS-ARDL Approach

Abstract

This study aims to examine the effects of financial inclusion on poverty reduction and income inequality with a focus on South Asian economies from 2004 to 2020 by employing dynamic panel models augmented with a comprehensive composite financial inclusion index and a set of well-known macroeconomic predictors. The primary results confirm the long-run relationships between financial inclusion, poverty headcount ratio and the Gini index, while the results of the cross-sectionally augmented autoregressive distributed lags model indicate that financial inclusion is significantly effective in reducing poverty and income disparities. Moreover, the findings reveal that real per capita income, institutional quality, age dependency ratio, credit to the private sector, inflation rate, school enrolment rate, trade openness, ratio of mobile users, and information and communication technologies are highly significant in intermediating the aggregate effects of financial inclusion on reducing poverty and income inequality. The findings clearly show that the greater impact of financial inclusion on reducing poverty and income inequality is primarily based on the development, enhancement and promotion of financial inclusion in South Asian economies, where the financially excluded segment constitutes a significant proportion of society.