Financial inclusion and poverty: The case of Peru

Poverty is ostensibly a multi-dimensional issue. Economic, social and political forces play a role in its creation as well as in its eradication. Financial inclusion, understood as the provision of micro-loans to populations that have never before had access to lending, has for some time been consid- ered a useful way to help reduce poverty. In this paper, we test the power of financial inclusion in influencing poverty outcomes compared to other variables such as the provision of development aid and technology progress. To this end, we employ a panel data analysis based on a unique 2008-2010 database on financial inclusion in Peru. Our regression results show that financial inclusion does have an alleviating effect on various indicators of poverty. The coefficients are relatively large and statistically significant when a random effect model is applied. However, with an instrumental variable regression addressing the problem of reversal causality, the coefficients turn insignificant. Interestingly, indices of urbanisation (i.e. lower rurality) and internet access are associated with lower poverty incidence. Although some predictable results, such as the positive effect of food aid on poverty, are confirmed by this research, higher employment rates appear to be insignificant in the quest to help reduce poverty