Financial Inclusion, Rather Than Size, is the Key to Tackling Income Inequality

This paper empirically assesses whether financial inclusion contributes to reducing income inequality when other key factors, such as economic development and fiscal policy are constant. It uses all available measures of financial inclusion to evaluate whether a country with a high degree of financial inclusion can be expected to have a more equal income distribution after controlling for key relevant factors, mainly economic development and policy. The paper suggests that a large financial system does not necessarily coincide with easy access to and use of financial services by those that are most financially constrained, namely households and small and medium enterprises (SMEs). It finds that size of the financial sector does not really contribute to a more equal income distribution, measured by the GINI coefficient, while financial inclusion does so in a very significant way. It covers the following sections in detail:

• Different measures for financial inclusion and income distribution with a discussion on their advantages and disadvantages;
• Methodology used for the study with a focus on variable definitions, proxies used, and source of dataset;
• Review of stylized facts on the relationship between financial inclusion and financial inequality;
• Results of the analysis and concluding remarks.