Effect of Financial Inclusion on Poverty and Vulnerability to Poverty: Evidence Using a Multidimensional Measure of Financial Inclusion

Abstract

This study examines the effect of financial inclusion on poverty and vulnerability to poverty of Ghanaian households. Using data extracted from the seventh round of the Ghana Living Standards Survey in 2016/17, a multiple correspondence analysis is employed to generate a financial inclusion index, and three-stage feasible least squares is used to estimate households’ vulnerability to poverty. Endogeneity associated with financial inclusion is resolved using distance to the nearest bank as an instrument in an instrumental variables probit technique. Results showed that while 23.4% of Ghanaians are considered poor, about 51% are vulnerable to poverty. We found that an increase in financial inclusion has two effects on household poverty. First, it is associated with a decline in a household’s likelihood of being poor by 27%. Second, it prevents a household’s exposure to future poverty by 28%. Female-headed households have a greater chance of experiencing a larger reduction in poverty and vulnerability to poverty through enhanced financial inclusion than do male-headed households. Furthermore, financial inclusion reduces poverty and vulnerability to poverty more in rural than in urban areas. Governments are encouraged to design or enhance policies that provide an enabling environment for the private sector to innovate and expand financial services to more distant places. Government investment in, and regulation of, the mobile money industry will be a necessary step to enhancing financial inclusion in developing countries.

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Fig. 1

Source: Authors’ Construct

Fig. 2

Source: Authors’ generated estimates from the GLSS7

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Acknowledgements

We would like to thank the Ghana Statistical Service for granting us the permission to use the GLSS7 data for this study. We also express our gratitude to the two anonymous reviewers whose suggestions and comments have helped to improve the quality of the paper.

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Appendices

Appendix 1: post estimation plot of category coordinates

figurea

Appendix 2: summary statistics of variables used in the analyses

Variables Full Location Gender
Rural Urban Male Female
Mean SD Mean SD Mean SD Mean SD Mean SD
Poor (yes = 1; no = 0) 0.236 0.425 0.396 0.489 0.079 0.269 0.260 0.438 0.177 0.382
Vulnerability to poverty (yes = 1; no = 0) 0.512 0.500 0.779 0.415 0.249 0.432 0.527 0.499 0.472 0.499
Ownership of mobile money account 0.093 0.290 0.071 0.258 0.093 0.290 0.083 0.276 0.080 0.272
Ownership bank account 0.190 0.393 0.118 0.323 0.261 0.439 0.203 0.403 0.158 0.365
Ownership of insurance policy 0.235 0.424 0.212 0.408 0.254 0.435 0.228 0.419 0.246 0.431
Access to credit 0.040 0.196 0.033 0.177 0.028 0.164 0.030 0.171 0.030 0.170
Receipt of remittance 0.303 0.460 0.275 0.447 0.269 0.443 0.207 0.405 0.432 0.496
Age of household head 46.994 14.179 47.596 14.602 46.402 13.728 46.360 13.659 48.568 15.286
Household size 5.652 3.291 6.349 3.693 4.968 2.671 6.088 3.483 4.567 2.439
Household size squared 42.772 60.527 53.941 74.803 31.817 39.067 49.198 67.771 26.802 31.558
Female (male = 0; female = 1) 0.287 0.452 0.248 0.432 0.325 0.468     
Rural (urban = 0; rural = 1) 0.495 0.500      0.522 0.500 0.428 0.495
Educated (no = 0; yes = 1) 0.501 0.500 0.373 0.484 0.626 0.484 0.554 0.497 0.369 0.483
Consulted at hospital (no = 0; yes = 1) 0.098 0.297 0.105 0.306 0.091 0.288 0.081 0.272 0.141 0.348
Married (no = 0; yes = 1) 0.653 0.476 0.682 0.466 0.624 0.484 0.816 0.388 0.247 0.431
Employment status
 Unemployed 0.070 0.255 0.066 0.249 0.073 0.260 0.063 0.243 0.087 0.281
 Retired/inactive 0.091 0.288 0.084 0.277 0.098 0.298 0.074 0.262 0.134 0.341
 Employee 0.249 0.433 0.138 0.345 0.358 0.479 0.301 0.459 0.120 0.325
 Self employed 0.590 0.492 0.711 0.453 0.471 0.499 0.562 0.496 0.660 0.474
Region
 Western 0.100 0.300 0.119 0.324 0.081 0.273 0.104 0.305 0.089 0.285
 Central 0.085 0.279 0.093 0.290 0.078 0.268 0.075 0.264 0.110 0.313
 Greater Accra 0.162 0.369 0.031 0.174 0.290 0.454 0.161 0.367 0.166 0.372
 Volta 0.087 0.281 0.115 0.320 0.058 0.234 0.085 0.279 0.091 0.288
 Eastern 0.106 0.308 0.123 0.328 0.090 0.286 0.100 0.299 0.123 0.328
 Ashanti 0.194 0.396 0.155 0.362 0.233 0.423 0.174 0.379 0.244 0.430
 Brong Ahafo 0.095 0.293 0.106 0.308 0.083 0.276 0.094 0.292 0.096 0.295
 Northern 0.101 0.301 0.142 0.349 0.061 0.239 0.129 0.335 0.031 0.175
 Upper East 0.042 0.201 0.068 0.251 0.017 0.130 0.047 0.211 0.031 0.173
 Upper West 0.028 0.166 0.048 0.214 0.009 0.094 0.033 0.178 0.017 0.130
  1. Source: computed using GLSS7

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Koomson, I., Villano, R.A. & Hadley, D. Effect of Financial Inclusion on Poverty and Vulnerability to Poverty: Evidence Using a Multidimensional Measure of Financial Inclusion. Soc Indic Res 149, 613–639 (2020). https://doi.org/10.1007/s11205-019-02263-0

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Keywords

  • Financial inclusion
  • Poverty
  • Vulnerability
  • Mobile money
  • Ghana

JEL Classification

  • D03
  • D12
  • D14
  • I30
  • O12