Financial Development and Poverty Reduction: Can There Be a Benefit Without a Cost?

2008

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This article investigates how financial development helps to reduce poverty directly through the McKinnon conduit effect and indirectly through economic growth. The results obtained with data for a sample of developing countries from 1966 through 2000 suggest that the poor benefit from the ability of the banking system to facilitate transactions and provide savings opportunities but to some extent fail to reap the benefit from greater availability of credit. Moreover, financial development is accompanied by financial instability, which is detrimental to the poor. Nevertheless, the benefits of financial development for the poor outweigh the cost.

RePEc: Research Papers in Economics, 2005

This article investigates how financial development is beneficial to the reduction of poverty, on the one hand by promoting growth and in the other hand directly by the McKinnon conduit effect. At the same time, however, financial instability which accompanies financial development is detrimental to the poor and dampens the positive effect of financial development on the reduction of poverty. These hypotheses are tested successfully on a sample of developing countries over the period 1966-2000, resulting in straightforward policy implications.

2020

Financial development is one of the pillars of economic development and growth at national level. While it improves revenue at macro level, its effect on distribution of wealth or income inequality and poverty is unknown. Therefore, the present paper is an analytical attempt to analyze the effects of financial development on poverty along with the factors effective in poverty in selected member countries of the Organization of Islamic Cooperation (formerly Organization of the Islamic Conference). By this study, the author hopes to take a small step towards alleviation of poverty in the Islamic countries that claim to be the leaders of justice and eradication of poverty. Based on the findings, ineffectiveness of the financial development index “ratio of private sector credit to gross domestic production” and the positive effect of government consuming spending on poverty are indicatives of state control on the economy in the selected Muslim countries. Expectedly, the private sectors ...

INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS), 2023

This study examined the impact of financial development and economic growth on poverty reduction in middle-income African countries using panel data from 1990 to 2021. The study was limited to Botswana, Kenya, Nigeria, South Africa and Tunisia. Im, Pesaran and Shin unit root test and Pedroni cointegration test approach were used for data analysis. Also, data were analysed using Panel ARDL model based on MG and PMG estimators proposed by Peseran and Smith (1995) and Peseran, Smith and Shin (1999). Results of the unit root test shows the variables are stationary of mixed order, while cointegration test indicates that the variables are linearly cointegrated in the long run. The study revealed that financial development proxy by broad money as share of GDP and broad money as ratio to reserve contributed to poverty reduct ion in the long the-run. On the other hand, Economic growth proxy by gross domestic product per capita also contributed to poverty reduction in the long run. On the contrary, financial development proxy by domestic credit to private sector as share of GDP had detrimental impact of poverty. To reduce poverty, the study recommended the need for the middle-income countries to implement long run sustainable financial and growth policies. Also, there is need for the implementation of sustainable financial policies that will encourage more credits to private sector at single digit interest rate to promote inclusive financial system, grow the economy and increase income redistribution and reduction in poverty.

Research in Applied Economics

This study examines the relationship between financial development, income inequality and poverty reduction in a sample of 48 Sub-Saharan African (SSA) countries, observed during the 1980-2017 period. The results indicate that financial development, when proxied by private sector credit and liquid liabilities, reduces poverty. The results are mixed for the Claims on domestic real nonfinancial sector by the Central Bank. On the other hand, the results of the direct and cross-estimates showed a positive and significant effect of income inequality on poverty. We conclude that income inequality is such large that a larger proportion of the population is impoverished and the poverty gap is widening further. Moreover, income inequality seems to slow down the positive effects of financial development on poverty reduction. The findings allow us to recommend that monetary and public authorities in SSA countries support the development of the financial sector, particularly banks, encourage fi...

Journal of Economic and Financial Sciences, 2021

Poverty affects the majority of the world's population and denies the poor of meeting their basic needs, which includes financial services, education, healthcare and sanitation, amongst others (see eds. Kandachar & Halme 2017:10). Prahalad and Hart (2002) argued that serving the poor in a way that is responsive to their needs is an effective mechanism for poverty reduction. Formal Orientation: Access to and use of formal finance can be an epitome for poverty reduction in developing and transitional economies. Most of these economies experienced great growth in gross domestic product (GDP) compounded with exploding inequality, including racial wealth gaps, increasing starvation, exorbitant health and housing costs. Research purpose: The aim of this study was to examine the relationship between financial intermediation and poverty within the context of financial dimensions of financial access, financial efficiency and financial stability. Motivation for the study: Previous literature focuses mainly on the role of financial development in poverty reduction, with a dearth of literature on the other financial dimensions of financial access, financial efficiency and financial stability in reducing poverty. Research approach/design and method: A quantitative approach was used in this study through econometric analysis of the data. A panel data analysis was used for a panel of 35 developing countries, mainly in Africa. The panel heterogeneous estimation method of pooled mean group was employed in a panel autoregressive distributed lags setting for this article Main findings: Financial intermediation, including the other financial dimensions, reduces poverty. The effect of the financial dimensions depended on how poverty is measured. Practical/managerial implications: Policymakers and development agencies should take note of poverty measurement in addressing poverty challenges. Distorted understanding of poverty will result in distorted policies, which yield little or no results for the effective use of formal finance to reduce poverty. Contribution/value-add: Other financial dimensions of the formal financial sector can be considered for the use in poverty reduction strategies.

2011

2004

The causal link between finance and growth is one of the most striking empirical macroeconomic relationships uncovered in the past decade. As this branch of the literature matures, the focus shifts from growth to other aspects of economic prosperity and from financial depth to multidimensional measures of financial development. This paper reviews the evolution of the literature and contributes by (i) showing that financial depth is negatively associated with headcount poverty, even after taking account of mean income and inequality; (ii) illustrating the pitfalls in equating financial development with financial depth and (iii) proposing alternative measures of financial development that, though summary, capture its multidimensional nature.

International Journal of Economics and Financial Issues

This paper examines whether financial services (McKinnon conduit) or provision of credit is more effective in reducing poverty in Nigeria using data for the period 1980-2018. It employs Autoregressive and Distributed Lag Model (ARDL) Approach to estimate the parameters and cointegration analyses for income and consumption models. The results of the ARDL Bound Test to Cointegration indicate a long-run relationship among the variables in the two models. The study reveals that availability and improvement in financial services is more beneficial than credit growth. In addition, the study suggests that financial instability may hurt the poor and retards the beneficial effect of financial development particularly in the short run. The paper recommends intensification of effort towards second-generation reforms, such as, design and implementation of financial inclusion policies that involve improving access to financial services that foster inclusive-growth. Furthermore, the study recommends guided deregulation in credit market as a way of precluding or subduing its susceptibility in triggering full-blown crises that is detrimental to the poor's aggregate welfare.

International Journal of Academic Research in Business and Social Sciences, 2013

Countries differ in the extent to which their financial systems are bank-based or marketbased. This paper presents evidence on the impact of financial structure on poverty reduction. Is a bank-based or market-based financial system preferred? If the theoretical literature on the subject does not offer a precise rethink on this issue, the majority of empirical studies argue for a bank oriented financial system. This paper stains to contribute to the debate on the financial structure and poverty. Particular attention is paid to the role of the financial liberalisation and its interaction with the financial system structure. Using panel data on a sample composed of 38 developing countries over the period 1990-2011 and applying the Generalized Method of Moment technique, we investigate the issue that the used financial structure indicators don't favour any financial sector. That is, in the presence of liberalised financial system, a bank-based financial system is better in reducing poverty.