Financial inclusion, poverty, and income inequality

Abstract

Financial inclusion has emerged as a critical tool for promoting economic development, particularly in developing countries. By providing access to affordable financial services, financial inclusion fosters economic participation, reduces poverty, and reduces income inequality. In Ghana, where poverty and income inequality remain persistent, understanding the developmental role of financial inclusion is crucial. This study examines the impact of financial inclusion on poverty alleviation and income inequality in Ghana from 1980 to 2021. A key contribution of this study is the construction of a comprehensive financial inclusion index that integrates both banking and insurance data. This dual-component index captures the broader scope of financial inclusion compared to traditional metrics that often focus solely on banking. The results reveal that financial inclusion indirectly enhances human development by improving education, health, and income equality, even though it does not directly reduce household poverty. Additionally, GDP per capita, ICT literacy, and remittances significantly influence human development outcomes, while inefficient government spending and rural population growth constrain progress. The positive interaction between financial inclusion and GNI per capita underscores the importance of economic growth in amplifying inclusion’s developmental benefits. Strengthening Ghana’s financial system, particularly in rural areas, can further advance poverty reduction and inclusive growth.