Examining the Impact of Fintech Based Financial Inclusion on Poverty and Income Inequality: A Study of Low and Lower Middle Income Countries

Abstract

Financial market imperfections such as information asymmetries, market segmentation, and transaction costs hinder poor people's access to formal financial goods and services, preventing them from escaping the poverty. UN Sustainable development goals includes the alleviation of income inequality and poverty from the world till 2030 and for the achievement of these goals financial inclusion is indispensable. Emergence of financial technologies paved the ways for financial inclusion. The data of twenty-three low and lower middle income countries for six years was used in this study. An index of fintech based financial inclusion which measured the three dimensions of fintech based financial inclusion such as supply (Access), demand (Usage) and overall access and usage for twenty-three countries was also developed and its impact was examined on poverty and income inequality by using the two step system gmm and fixed effect technique. It has been found out that fintech based financial inclusion demand side index (Usage) have negative impact on poverty. Whereas, Fintech based financial inclusion supply side index (Access) have positive impact on poverty and income inequality. Moreover, fintech based financial inclusion overall index has negative impact on poverty when fixed effect method was used but have positive impact on poverty when the two step system gmm was used. Furthermore, Fintech based financial inclusion overall index have positive impact on income inequality. This implies that fintech-based financial inclusion, rather than mitigating income inequality, exacerbates it. The core rationale behind these findings lies in the understanding that income inequality is a persistent, long-term issue that cannot be significantly reduced within a short timeframe. This research sheds light on the nuanced effects of fintech-based financial inclusion on poverty and income inequality, emphasizing the need for comprehensive, long-term strategies to address these challenges.