Digital financial inclusion and vulnerability to poverty: evidence from Chinese rural households

Abstract

PurposeDigital finance has the transformative power to realise financial inclusion. However, evidence on the relationship between digital finance and poverty reduction remains limited. This study examines the mitigating effects of digital financial inclusion (DFI) on vulnerability to poverty in rural China, explores potential mechanisms at the micro-level, and investigates the external conditions for DFI to validate these effects.Design/methodology/approachRural household data from the China Labour Force Dynamics Survey and the regional DFI index compiled by Peking University are used. The probit and mediation effect models are employed to assess the impacts of the DFI on vulnerability to poverty and explore its mechanisms, with an appropriate instrumental variable to mitigate potential endogeneity.FindingsDFI can mitigate vulnerability to poverty in Chinese rural households. Specifically, both sub-indices – coverage breadth and depth of use – have a significant effect. Further analyses based on the mediation model show that improving agricultural productivity, stimulating entrepreneurial activities and promoting non-agricultural employment are the core mechanisms for alleviating poverty vulnerability. Heterogeneity analysis shows that DFI is pro-poor and benefits those who lack economic opportunities. Moreover, adequate endowment in rural households, such as production and human capital, is an external condition for digital finance to mitigate vulnerability to poverty.Originality/valueThis study is among the first to examine the vulnerability-mitigation effects from the perspective of digital finance development, relying on data from a large-scale, nationwide household survey and the regional DFI index. It also checks for the mechanisms and heterogeneity of the effects, which prove the effects can help balance efficiency and equity.

Does Digital Inclusive Finance Mitigate the Negative Effect of Climate Variation on Rural Residents’ Income Growth in China?

“…For example, digital inclusive finance can help the commercial banks establish a more comprehensive data sharing system and a big data credit risk prevention system. Thus, commercial banks can obtain more market information and provide better credit services for rural residents [ 31 ]. Then, better credit services can help rural residents scientific manage their assets, improve their risk resilience, and indirectly increase their income levels.…”

The impact of digital finance on household participation in risky financial markets: Evidence-based study from China

“…Accordingly, some studies highlighted the importance of the information function and other features of digital finance [ 32 ]. First, digital finance promotes the development of financial inclusion through high-quality development [ 33 ], poverty reduction [ 34 ] and economic growth [ 35 ] while expanding the availability of financial services to vulnerable groups excluded by traditional finance [ 36 ]. Second, digital finance supports consumption [ 37 ], entrepreneurship [ 38 ] and urbanization [ 39 ] by increasing connectivity and reducing the digital divide.…”

Digital Financial Inclusion

“…In the literature, many studies on digital financial inclusion have emerged. In the year 2021 alone, many studies examined digital financial inclusion in relation to economic growth (Ahmad et al, 2021), entrepreneurship (Baker, 2021), urban-rural income gap (Ji et al, 2021), poverty reduction (Wang and Fu, 2021), investment diversification (Lu et al, 2021), complex systems (Dai, 2021), research and development (Sun et al, 2021), etc. Despite the increasing number of studies on digital financial inclusion, digital financial inclusionin terms of its meaning, goal, components, instruments and regulatory issues is not generally understood.…”