Financial Inclusion and Welfare in Post-Apartheid South Africa

The socioeconomic transformation process in post-apartheid South Africa has generated research on a wide range of economic issues, in particular, inequality and poverty. Surprisingly, there is limited empirical analysis on financial inclusion. This paper fills this void in the literature by answering two questions: (i) Does financial inclusion improve welfare? (ii) Is the benefit from using formal financial services greater than from using non-formal financial services? The paper uses a unique cross-sectional dataset on use of financial products over the period 2006a-2011. Two measures of welfare are constructed a- a well-being index and a wealth index. The sample is divided into users of formal financial services and users of non-formal financial services. The focus is on the differences in the welfare of the two groups. This difference in welfare is then decomposed through the Recentered Influence Function (RIF) approach. Finally, an OLS regression of the recentered welfare is estimated across quantiles for each group. Results show that: (i) overall, using formal financial products is associated with higher welfare; (ii) regardless of the measure of welfare used, the results are qualitatively similar: the wealth index picks up differences in the top quantiles, while the well-being index picks the differences in the lower quantiles; (iii) welfare disparities are accounted for by the unexplained factors related to income and education; and (iv) there are welfare gains from using non-formal credit and insurance products for individuals in the lower quantiles. The results suggest that the pursuit of financial inclusion should be complemented with policies that improve education and incomes, especially for the marginalised.