Examining the cointegrating relationship between financial intermediation and poverty in a selected panel of developing countries

Abstract

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.