Financial Development and Income Inequality in Indonesia: A Sub-national Level Analysis

It is widely believed that financial inclusion aids inclusive growth and reducing inequality. This study constructs financial inclusion indicator and analyzes the link of financial inclusion and income inequality for 33 provinces in Indonesia. In extension to analyses at national level, estimation has been done by dividing provinces into three categories which are agriculture, manufacture, and mining economies. By using Fixed Effect Panel Model, we find financial inclusion appears to have insignificant effect to inequality at national level. While at sub-national level, adding other variables such as GRDP, years of schooling, and trade openness, we find financial inclusion appears to have negative and significant impact on income inequality in manufacture and mining-based provinces, not in agriculture-based. The results suggest that financial inclusion helps to lower income inequality when economic condition encourage people to utilize financial access for productive purposes. More effective financial inclusion programs in rural area are highly demanded