The Impact of Financial Inclusion on Income Inequality

Abstract

All around the world, the value of an inclusive financial system is prioritized. Since most of the Middle East and North Africa (MENA) region’s governments lacked sufficient formal financial services and the majority of their populations lacked access to conventional bank accounts, the issue of financial exclusion became increasingly important. Financial inclusion benefits not only individuals and families but also entire communities as a whole and can stimulate the economy. This study’s objective is to evaluate the impact of financial inclusion on MENA region’s income inequality. The aim of this study is to investigate the impact of financial inclusion on the income inequality of MENA region countries. To achieve this aim, a three-dimension Financial Inclusion Index (FII) was created using Principal Component Analysis (PCA) to measure each country’s level of financial inclusion. These dimensions are access, usage, and quality of financial services. Data was collected from 18 MENA (Middle East and North Africa) region countries using a sample period from 2004 to 2019. Based on a 2-step Generalized Method of Moments (GMM) system, the results showed that an increase in the level of financial inclusion leads to the decrease of MENA region countries’ income inequality.