Financial inclusion and income distribution revisited: New findings

Abstract

Most previous studies have quantitatively shown that progress in financial inclusion reduces income inequality. This study uses linear and squared terms of financial inclusion to analyze whether and how its effect on reducing income inequality changes over time. Financial inclusion is measured using a composite indicator that considers factors such as accessibility, availability, and actual use of financial services. The analysis utilizes panel data from 2004 to 2021 and samples comprising all countries or only developing countries. The empirical results for both samples indicate that the linear and squared terms of financial inclusion have negative and statistically significant effects on income inequality. Therefore, financial inclusion can reduce income inequality, and the marginal effect increases as financial inclusion progresses. The empirical results also indicate that such effects vary depending on the dimension of financial inclusion (i.e., access versus use) and type of financial services considered (i.e., bank accounts versus loans). For example, when financial inclusion is measured solely in terms of borrowing from formal financial institutions, the financial inclusion and income inequality relationship may be U-shaped. Therefore, different aspects of financial inclusion may affect income inequality differently over time.