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Financial inclusion can help curb detrimental effects of inequality, according to new study

An academic from Queen Mary University of London has published a research paper which shows that financial inclusion could be a tool to curb the rise in poverty in the wake of the Covid-19 pandemic.

23 June 2020

A person checking stock market data on a smartphone
A person checking stock market data on a smartphone

Written by Dr Roxana Gutiérrez-Romero and Dr Mostak Ahamed, and published as part of Queen Mary’s Centre for Globalisation Research working paper series, the findings show that financial inclusion has been instrumental in reducing increases in poverty in middle-low and low-income economies such as much of Africa and Asia over the last two decades.

Millions at risk of poverty

The study forecasts that over 240 million people worldwide will be pushed into poverty by 2021 if no adequate measures are taken to prevent this. The results of the study contrast with earlier studies which have shown that financial inclusion is associated with lower levels of poverty only in high- and upper-middle income economies.

Financial inclusion can include the provision of micro-credits as well as broadening access to financial services, such as savings, insurance and mobile banking.

The results also show that financial inclusion does help to reduce poverty by offsetting the detrimental effects of inequality. It helps to reduce existing inequalities in financial outreach and use of financial services that are likely to enable poorer people to make more productive investments, smooth their consumption from important shocks like the ongoing pandemic.

Global interventions needed

Dr Roxana Gutiérrez-Romero, Reader in Quantitative Methods and Policy at Queen Mary said: “Our findings suggest that financial inclusion does not directly reduce poverty, but indirectly by helping to reduce the detrimental effect of inequality on poverty.  

“Our research shows that economic growth does not reduce poverty in very unequal countries as gains disproportionately benefit the better off. However, the poor can benefit from economic growth in unequal countries that have broader financial inclusion by enabling the most vulnerable groups to make productive investments and smooth their consumption during economic shocks.

“Globally, there are 1.7 billion adults without an account at a financial institution or a mobile money provider. Given the existing social mobility restrictions it is more important than ever for governments to find ways to reach struggling households.

“Our forecasts suggest that the share of the world’s population living on less than $1.90 per day could increase from 8 per cent to 14 per cent by 2021, pushing nearly 400 million people into poverty. We acknowledge that these forecasts have a wide margin of error and that we have not taken yet into account the support policies that over 181 countries have very recently put into place to minimise the impact of the pandemic. Nonetheless we show that financial inclusion could be a key complementary tool to help mitigate the impacts that COVID-19 could have on poverty around the world.”

More information

Working paper: Ahamed, Mostak & Gutiérrez-Romero, Roxana (2020). COVID-19 response needs to broaden financial inclusion to curb the rise in poverty, Queen Mary University of London, CGR Working Paper 105.