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

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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

figure a

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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