Re-examining the Nexus Between Financial Development and Poverty Reduction: Evidence from Emerging Economies

During the past two decades, the research on financial development and growth has gained a lot of coverage. This research looks at the degree to which financial development helps alleviate poverty. Cointegration estimation of the system, called the FMOLS, was applied over the period 1995–2015 to a panel of five African emerging economies. Using liquid liability as a percentage of GDP and bank domestic credit as a percentage of GDP as the main financial development indicators, the findings indicate that both financial development indicators minimize poverty. Other factors such as economic growth and inflation are not statistically significant. Government spending, on the other hand, does not tend to affect poverty irrespective of the measure of financial growth employed. These findings suggest that while financial growth is capable of reducing poverty, it must be combined with a reduction in inflation, as well as other macroeconomic variables. The use of liquid liability and bank domestic credit as measures of financial growth is robust to the results.