The paradox of the financial inclusion-poverty nexus in Malawi

Abstract

The global concerted drive for financial inclusion (FI) as a solution for poverty reduction (PR) is confronted by indications that a majority of the target cite low incomes or poverty itself as a barrier to FI. This is paradoxical as it implies that the FI drive could especially leave the core-poor behind. This study offers a perspective on the foundations of the expectations of the FI-PR drive and the possible reasons for the paradox. The study then investigates the paradox from a different, indirect and independent perspective. Models are estimated for the FI-income and income-FI linkages using variables derived from a 2013 Malawi national household survey. The results indicate a bi-directional positive FI-income relationship and a negative poverty/low income–FI one implying support for the FI-PR push but also supporting the poverty-FI barrier effect. Other unsettling but familiar results indicate that the brunt of the FI-poverty imbalance is borne by the obviously weaker segments of society because poverty itself is associated with households that are larger, headed by those who are females, older, and with lower educational levels. The major implications of the present findings are dire in that the brokerage approach to reduce poverty via FI would not be a reliable one for the very low-income, the core-poor. These would need unconventional FI interventions and improvements on the direct PR approaches including addressing production and employment outcomes.