Threshold Effect of Financial Inclusion on Poverty Reduction in Africa: Does institutional quality play a role?

ABSTRACT

In Africa, poverty levels are still very high, especially with the advent of the COVID-19 pandemic, despite efforts by governments and development partners to address it. Financial inclusion has been identified as an important concept in fighting poverty due to its ability to increase the income level of households. This study sought to estimate the threshold level at which financial inclusion, aided by strong institutions, will lead to poverty reduction in Africa, using Hansen’s threshold estimation method, covering a period of 2004–2020. The Hansen threshold estimation method uses an endogenous approach to identify threshold values, which eliminates deterministic process by using a systematic approach, as compared to the linear methods of sample-splitting of threshold-level specifications by other methods. This therefore makes the Hansen threshold estimation method robust in threshold estimations compared to other methods. The study found double threshold values of 0.0534 and 0.341, indicating that a financial inclusion value below 0.0534 would increase household consumption expenditure, leading to poverty reduction. However, a threshold value between 0.0534 and 0.3141 has a negative impact on poverty reduction. Furthermore, beyond a threshold value of 0.3141, financial inclusion will improve household consumption and as such reduce poverty in Africa. The study also established a threshold value of institutional quality index of −1.6325, indicating that below that institutional quality index, financial inclusion will have a negative impact on household consumption as well as poverty reduction in Africa. The results further indicated that dependency ratio, gross national income, interest rate, inflation, education, and government expenditure contribute significantly to poverty reduction in Africa. It is recommended that development partners, central banks and governments in the region should consciously develop and implement financial literacy policies, with the collaboration of all financial institutions that are aimed at promoting financial inclusion due to its ability to end poverty.

PUBLIC INTEREST STATEMENT

Financial inclusion has been accepted globally to be the means to end global poverty due to its ability to ensure growth in the income of households. Africa is one of the poorest continents in the world, indicating, among others, that there is a low financial inclusion level in the continent. The relationship between financial inclusion and poverty reduction has been inconclusively established in the literature. Most importantly, the establishment of the nonlinear relationship between the financial inclusion and poverty reduction and estimation of the exact level of financial inclusion that will trigger poverty reduction are all missing in the literature. There is also the need to interrogate the level at which financial barriers will hurt the poverty reduction efforts. To handle these concerns, this study estimates the threshold level at which financial inclusion will lead to poverty reduction as well as the threshold level at financial barriers will prevent one from participating in the financial sector. In all of these, the moderating role institutional quality plays in the financial inclusion and poverty reduction drive was also investigated. It was established in the study that there exists a double threshold level at which financial inclusion, moderated by strong institutions, will stimulate poverty reduction in Africa as well as a single threshold level at which financial barriers will hinder one from participating in the financial sector and the poverty reduction efforts. In view of the findings, the study stated some policy recommendations aimed at improving financial inclusion to stimulate poverty reduction in Africa.

KEYWORDS:

• Financial inclusion
• poverty reduction
• Africa
• institutional quality
• threshold level

Disclosure statement

No potential conflict of interest was reported by the author(s).