Does Financial Inclusion Reduce Income Inequality and Poverty? Evidence from Eastern and Western Indonesia

Yasmin Yasmin (), Muhammad Ali Mustofa () and Amirullah Setya Hardi ()
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Yasmin Yasmin: Department of Sharia Economics, Faculty of Islamic Economics and Business, Islamic State University (UIN) Sunan Kalijaga
Muhammad Ali Mustofa: Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada
Amirullah Setya Hardi: Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada

No 202503005, Gadjah Mada Economics Working Paper Series from Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada

Abstract: The nexus between financial inclusion, income inequality, and poverty remains debated, especially in developing economies with diverse regional contexts. This study examines the impact of financial inclusion on inequality and poverty across 33 Indonesian provinces using panel data. We estimate Fixed-Effects and Generalized Method of Moments (GMM) models to address unobserved heterogeneity and potential endogeneity. Financial inclusion is proxied by deposits per capita, while key outcomes are provincial income inequality and poverty rates. Results show a significant negative association between financial inclusion and both inequality and poverty. Regional heterogeneity is evident: the poverty-reducing effects of financial inclusion are stronger in Eastern Indonesia than in the more developed Western region. These findings highlight the need for region-specific policies that expand affordable financial access, strengthen financial literacy, and deepen financing for micro, small, and medium enterprises (MSMEs) to support inclusive growth. Future research should assess the roles of fintech and Islamic finance, evaluate how financial inclusion shapes MSME performance, and rigorously examine the effectiveness of Indonesia’s National Strategy for Financial Inclusion to inform progress toward the Sustainable Development Goals.

Keywords: Financial Inclusion; Income Inequality; Poverty; Fixed-Effect Model; Generalized Method of Moments (GMM) (search for similar items in EconPapers)
JEL-codes: C23 D63 G20 I32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2025-03
New Economics Papers: this item is included in nep-sea
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