CONTRIBUTION OF FINANCIAL DEPTH AND FINANCIAL ACCESS TO POVERTY REDUCTION IN INDONESIA

Abstract

This research attempts to analyze possible relationships between financial depth and financial access indicators with poverty in Indonesia. Financial depth indicators include the ratio of savings to gross domestic regional product and the ratio of credit to gross domestic regional product. Financial access indicators include the number of banks and number of cooperatives, while poverty is measured by poverty headcount ratio. This research utlizes a panel provincial level data in Indonesia consisting of 33 provinces for the period of 2007 to 2015. The main findings of this research is that financial development variables show a statistically significant negative relationship with poverty, confirming the contribution of financial depth and financial access in reducing poverty in Indonesia. However, the savings variable shows contradictory results, suggesting that in regions where the savings rate is high, the poverty rate tends to be high also. A possible explanation is that consumption of private and household sector contributes significantly to Indonesia’s GDP. Therefore, the effect of consumption is more effective in reducing poverty than the effect of savings.