The recent financial crisis has brought to the forefront renewed concerns about the merit of financial development, especially for the most vulnerable segments of our population. Studies on the relationship between financial development and poverty have been inconclusive. Some claim that, by allowing more entrepreneurs to obtain financing, financial development improves the allocation of capital, which has a particularly large impact on the poor. Others argue that it is primarily the rich and politically connected who benefit from improvements in the financial system. This paper looks at a sample of 37 countries in sub-Saharan Africa from 1992 through 2006. Its results suggest that financial deepening could narrow income inequality and reduce poverty, and that stronger property rights reinforce these effects. Interest rate and lending liberalization alone could, however, be detrimental to the poor if not accompanied by institutional reforms, in particular stronger property rights and wider access to creditor information. JEL Classification Numbers: O11, O16, G00
The recent financial crisis has brought to the forefront renewed concerns about the merit of financial development, especially for the most vulnerable segments of our population. Studies on the relationship between financial development and poverty have been inconclusive. Some claim that, by allowing more entrepreneurs to obtain financing, financial development improves the allocation of capital, which has a particularly large impact on the poor. Others argue that it is primarily the rich and politically connected who benefit from improvements in the financial system. This paper looks at a sample of 37 countries in sub-Saharan Africa from 1992 through 2006. Its results suggest that financial deepening could narrow income inequality and reduce poverty, and that stronger property rights reinforce these effects. Interest rate and lending liberalization alone could, however, be detrimental to the poor if not accompanied by institutional reforms, in particular stronger property rights and wider access to creditor information. JEL Classification Numbers: O11, O16, G00
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Studies on the link between financial development and poverty have been inconclusive. Some claim that deeper financial sectors should improve the allocation of capital by allowing entrepreneurs greater access to finance, which should particularly favour the poor. Others argue that improvements in the financial system primarily benefit the rich and politically connected. The literature has also been ambiguous about the channels through which finance may be associated with lower poverty (deposits vs. credit). Looking at a sample of 37 countries in sub‐Saharan Africa from 1992 through 2006, the paper suggests that financial deepening is associated with lower poverty through different channels depending on the strength of property rights. In the absence of well‐defined and enforced property rights, wider access to saving and risk‐sharing instruments is accompanied by a reduction in poverty. Only once property rights grow stronger, is credit associated with lower poverty.
Recent studies on the relationship between financial development and poverty have been inconclusive. Some claim that, by allowing more entrepreneurs to obtain financing, financial development improves the allocation of capital, which has a particularly large impact on the poor. Others argue that it is primarily the rich and politically connected who benefit from improvements in the financial system. This paper looks at a sample of 37 countries in sub-Saharan Africa from 1992 through 2006. Its results suggest that financial deepening could widen income inequality and increase poverty, if not accompanied by stronger property rights. Similarly, interest rate and lending liberalization alone could be detrimental to the poor without institutional reforms, in particular stronger property rights and wider access to credit information.
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