How does access to formal finance affect household welfare dynamics? Micro evidence from Nigeria

The relationship between access to formal finance and poverty reduction lies at the heart of the development literature and policy discourse, particularly in developing countries, where access to financial services is often argued to have poverty-alleviating potential. Most of the stylised theoretical literature and empirical evidence, however, focus their efforts on the poverty-alleviating potential of access to finance at a given point in time, which ignores the dynamic and multidimensional nature of poverty. Using a nationally representative panel data set of households, this paper explores the effect of access to formal finance on household welfare dynamics in Nigeria between 2010–11 and 2012–13. Applying a bivariate probit model, which addresses the endogenous selection associated with households’ initial welfare status, our estimates indicate that controlling for the exogeneity of initial household status is relevant when exploring the implications of access to finance for welfare dynamics in Nigeria, as the exogenous treatment of the initial conditioning may distort the correlation coefficients of our estimates. Our results suggest that access to formal finance has poverty-reducing effects, as we found that initially poor households with access to finance were less likely to remain poor in the subsequent period. Also, initially non-poor households with access to finance were seen to face a lower probability of descending into poverty over the period, thus suggesting that access to finance plays a significant role in reducing transient poverty.