Does Access to Formal Finance Matter for Welfare and Inequality? Micro Level Evidence from Nigeria

Abstract

Using a treatment effects model, decomposition techniques and representative household data from Nigeria, this paper explores the living standard and inequality implications of access to formal finance. Formal access to finance is found to improve household welfare, but also increase inter-household inequalities, despite ameliorating the inequality enhancing effect of urban versus rural residence and enhancing the inequality ameliorating effect of greater educational attainment. The positive effect of access to formal finance on inequality is substantially smaller than the effect of unobserved household characteristics, indicating that welfare and equality enhancing strategies should follow a holistic approach.

Testing the impact of financial inclusion on income convergence: Empirical evidence from Nigeria

“…Financial inclusion has become a key pillar of the policies aimed at promoting inclusive development in the majority of countries around the world (Zhang & Posso, 2019). This emanates from the realization that an inclusive financial system could be instrumental in the reduction of poverty and income inequality (Dimova & Adebowale, 2018). It is instructive to draw a conceptual demarcation between inclusive and exclusive finance.…”

“…While advanced economies have enhanced financial access (such as savings, credit, and insurance, among others), in the majority of less advanced economies, the overwhelming proportion of adults still lack access to formal financial services (Dimova & Adebowale, 2018). With 13% of unbanked adults, South Africa has the lowest proportion of financial exclusion among the major African economies (Ibrahim, Ozdeser, & Cavusoglu, 2019).…”

“…However, financial inclusion has evolved over time in Nigeria, with some stylized statistics pointing to an increase in financially included adults from 23.6% in 2008 to 48.6% in 2014 (Enhancing Financial Innovation and Access (EFInA), 2017). This was partly achieved as a result of the successful transition from a repressed to a liberalized financial system as well as the success recorded after the implementation of the National Financial Inclusion Strategy in 2012 (see Dimova & Adebowale, 2018; Ibrahim et al, 2019 for review).…”

“…Some stylized statistics have, for instance, indicated that the proportion of Nigeria's financial inclusion has dropped from the record 48.6% achieved in 2014 to 38.3% in 2016 (CBN, 2017; EFInA, 2017). Similarly, in the rural areas where about 63.9% of the adult population are based, the proportion of banked adults dropped from 25% in 2014 to 24.4% in 2016 (EFInA, 2017; Ibrahim et al, 2019) due to some social and institutional challenges, such as the mounting dominance of the informal sector, low human development, demographic challenges (Aliero, Ibrahim, & Shuaibu, 2013), and infrastructural deficiencies (Dimova & Adebowale, 2018; Gani & Ibrahim, 2015).…”

“…There are theoretical arguments that predict that the welfare enhancing drive of financial inclusion will eventually trickle down to the poor and thus reduce income disparity (Anyanwu, 2014; Ibrahim et al, 2012). The extant micro‐level studies (Dimova & Adebowale, 2018; Nwosu & Orji, 2017; Ogunleye, 2017; Zhang & Posso, 2019) revolve around access to finance, income, poverty, welfare, and the gendered comparative benefit of financial inclusion. However, studies on the income convergence process of financial inclusion are very limited.…”