Financial inclusion in the digital era: a key driver for reducing income inequality
Abstract
Growing income inequality remains a pressing phenomenon in many developing economies, especially Sub-Saharan Africa (SSA), and may cause discontent in achieving inclusive growth which is crucial for sustainable development. Economies turning to financial inclusion as a critical component of economic development where access to formal financial institutions and services remains limited in the region. Digital technology has the potential to advance financial inclusion by tapping technology to extend financial access to underserved populations, as lack of access to efficient financial products and services can perpetuate income disparities. We employ a generalized quantile regression with an instrumental variables framework to investigate the distributional effects of financial inclusion and digitalization on income inequality in the region. Results imply that the use and adoption of the internet and mobile phones contribute to reducing income inequality, highlighting the transformative potential of digitalization across different quantiles. The findings indicate that public expenditure favors distributional impacts on inequality across quantiles. Our study suggests that policymakers in the region should prioritize the adoption and use of digital technology and foster an enabling policy that encourages the development of digital infrastructure and financial services to ensure widespread access and benefits for all segments of the population.
First published online 18 February 2025
Keyword : digitalization, financial inclusion, income inequality, panel quantile regression
How to Cite
Li, Z., Lunku, H. S., & Yang, S. (2025). Financial inclusion in the digital era: a key driver for reducing income inequality. Technological and Economic Development of Economy, 1-26. https://doi.org/10.3846/tede.2025.23068
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 46(1), 33–50. https://doi.org/10.2307/1913643
Koenker, R. (2004). Quantile regression for longitudinal data. Journal of Multivariate Analysis, 91(1), 74–89. https://doi.org/10.1016/j.jmva.2004.05.006
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Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1–28.
Machado, J. A. F., & Santos Silva, J. M. C. (2019). Quantiles via moments. Journal of Econometrics, 213(1), 145–173. https://doi.org/10.1016/j.jeconom.2019.04.009
Meniago, C., & Asongu, S. A. (2018). Revisiting the finance-inequality nexus in a panel of African countries. Research in International Business and Finance, 46, 399–419. https://doi.org/10.1016/j.ribaf.2018.04.012
Mialou, A., Amidzic, G., & Massara, A. (2017). Assessing countries’ financial inclusion standing – A new composite index. Journal of Banking and Financial Economics, 2(8), 105–126. https://doi.org/10.7172/2353-6845.jbfe.2017.2.5
Mora-Rivera, J., & García-Mora, F. (2021). Internet access and poverty reduction: Evidence from rural and urban Mexico. Telecommunications Policy, 45(2), Article 102076. https://doi.org/10.1016/j.telpol.2020.102076
Njangang, H., Beleck, A., Tadadjeu, S., & Kamguia, B. (2022). Do ICTs drive wealth inequality? Evidence from a dynamic panel analysis. Telecommunications Policy, 46(2), Article 102246. https://doi.org/10.1016/j.telpol.2021.102246
Odusola, A. (2017). Fiscal space, poverty and inequality in Africa. African Development Review, 29(S1), 1–14. https://doi.org/10.1111/1467-8268.12229
Omar, M. A., & Inaba, K. (2020). Does financial inclusion reduce poverty and income inequality in developing countries? A panel data analysis. Journal of Economic Structures, 9, Article 37. https://doi.org/10.1186/s40008-020-00214-4
Opoku, E. E. O., & Aluko, O. A. (2021). Heterogeneous effects of industrialization on the environment: Evidence from panel quantile regression. Structural Change and Economic Dynamics, 59, 174–184. https://doi.org/10.1016/j.strueco.2021.08.015
Park, C.-Y., & Mercado, R. (2018). Financial inclusion, poverty, and income inequality. The Singapore Economic Review, 63(1), 185–206. https://doi.org/10.1142/S0217590818410059
Pesqué‐Cela, V., Tian, L., Luo, D., Tobin, D., & Kling, G. (2021). Defining and measuring financial inclusion: A systematic review and confirmatory factor analysis. Journal of International Development, 33(2), 316–341. https://doi.org/10.1002/jid.3524
Piketty, T. (1997). The dynamics of the wealth distribution and the interest rate with credit rationing. Review of Economic Studies, 64(2), 173–189. https://doi.org/10.2307/2971708
Powell, D. (2020). Quantile treatment effects in the presence of covariates. The Review of Economics and Statistics, 102(5), 994–1005. https://doi.org/10.1162/rest_a_00858
Riggins, F., & Dewan, S. (2005). The digital divide: Current and future research directions. Journal of the Association for Information Systems, 6(12), 298–337. https://doi.org/10.17705/1jais.00074
Sarkodie, S. A., & Strezov, V. (2019). Economic, social and governance adaptation readiness for mitigation of climate change vulnerability: Evidence from 192 countries. Science of The Total Environment, 656, 150–164. https://doi.org/10.1016/j.scitotenv.2018.11.349
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Solt, F. (2020). Measuring income inequality across countries and over time: The standardized world income inequality database. Social Science Quarterly, 101(3), 1183–1199. https://doi.org/10.1111/ssqu.12795
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World Bank. (n.d.). World development indicators. https://databank.worldbank.org/source/world-development-indicators
Yin, Z. H., & Choi, C. H. (2023). Does digitalization contribute to lesser income inequality? Evidence from G20 countries. Information Technology for Development, 29(1), 61–82. https://doi.org/10.1080/02681102.2022.2123443
Zhang, Q., & Posso, A. (2019). Thinking inside the box: A closer look at financial inclusion and household income. The Journal of Development Studies, 55(7), 1616–1631. https://doi.org/10.1080/00220388.2017.1380798
Zhang, R., & Ben Naceur, S. (2019). Financial development, inequality, and poverty: Some international evidence. International Review of Economics & Finance, 61, 1–16. https://doi.org/10.1016/j.iref.2018.12.015
Ahmed, A., & Al‐Roubaie, A. (2013). Poverty reduction in the Arab world: The use of ICTs. World Journal of Science, Technology and Sustainable Development, 10(3), 195–211. https://doi.org/10.1108/WJSTSD-02-2013-0014
Ali, M. A., Alam, K., Taylor, B., & Rafiq, S. (2019). Do income distribution and socio-economic inequality affect ICT affordability? Evidence from Australian household panel data. Economic Analysis and Policy, 64, 317–328. https://doi.org/10.1016/j.eap.2019.10.003
Amador, J., & Cabral, S. (2017). Networks of value‐added trade. The World Economy, 40(7), 1291–1313. https://doi.org/10.1111/twec.12469
Brei, M., Ferri, G., & Gambacorta, L. (2018). Financial structure and income inequality (BIS Working Paper No. 756). Bank for International Settlements.
Bresson, F. (2004). Effet du développement financier sur les inégalités de revenus au travers des investissements productifs et éducatifs [Effect of financial development on income inequalities through productive and educational investments] (Working Paper No. 200409). CERDI.
Byaro, M., Rwezaula, A., & Ngowi, N. (2023). Does internet use and adoption matter for better health outcomes in sub-Saharan African countries? New evidence from panel quantile regression. Technological Forecasting and Social Change, 191, Article 122445. https://doi.org/10.1016/j.techfore.2023.122445
Chancel, L., Piketty, T., Saez, E., & Zucman, G. (2022). World inequality report (2022). World Inequality Lab. https://wir2022.wid.world/www-site/uploads/2023/03/D_FINAL_WIL_RIM_RAPPORT_2303.pdf
Chernozhukov, V., & Hansen, C. (2008). Instrumental variable quantile regression: A robust inference approach. Journal of Econometrics, 142(1), 379–398. https://doi.org/10.1016/j.jeconom.2007.06.005
de Moraes, C. O., & Cruz, G. (2023). What do we know about the relationship between banks and income inequality? Empirical evidence for emerging and low-income countries. Journal of Economics and Business, 123, Article 106086. https://doi.org/10.1016/j.jeconbus.2022.106086
DiMaggio, P., Hargittai, E., Celeste, C., & Shafer, S. (2004). Digital inequality: From unequal access to differentiated use. In K. Neckerman (Ed.), Social inequality (pp. 355–400). Russel Sage Foundation.
Durlauf, S. (1996). A theory of persistent income inequality. Journal of Economic Growth, 1(1), 75–93. https://doi.org/10.1007/BF00163343
Faizah, C., Yamada, K., & Pratomo, D. S. (2021). Information and communication technology, inequality change and regional development in Indonesia. Journal of Socioeconomics and Development, 4(2), 224–335. https://doi.org/10.31328/jsed.v4i2.2669
Greenwood, J., & Jovanovic, B. (1990). Financial development, growth, and the distribution of income. Journal of Political Economy, 98(5), 1076–1107. https://doi.org/10.1086/261720
Hsieh, J. J. P.-A., Rai, A., & Keil, M. (2008). Understanding digital inequality: Comparing continued use behavioral models of the socio-economically advantaged and disadvantaged. MIS Quarterly, 32(1), 97–126. https://doi.org/10.2307/25148830
International Monetary Fund (2020). World economic outlook: A long and difficult ascent. https://www.elibrary.imf.org/display/book/9781513561769/9781513561769.xml
International Monetary Fund (2023). Financial access survey. https://data.imf.org/fas
International Telecommunication Union. (2022). ICT accessibility overview: Assessment for the Africa region. https://www.itu.int/hub/publication/d-phcb-ict_access_afr-2022-01/
International Telecommunication Union. (2023). Measuring digital development: Facts and figures focus on least developed countries. https://www.itu.int/itu-d/reports/statistics/facts-figures-2023
Jackson, J. E. (2003). A user’s guide to principal components. Wiley.
Jauch, S., & Watzka, S. (2016). Financial development and income inequality: A panel data approach. Empirical Economics, 51, 291–314. https://doi.org/10.1007/s00181-015-1008-x
Kebede, J., Naranpanawa, A., & Selvanathan, S. (2023). Financial inclusion and income inequality nexus: A case of Africa. Economic Analysis and Policy, 77, 539–557. https://doi.org/10.1016/j.eap.2022.12.006
Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 46(1), 33–50. https://doi.org/10.2307/1913643
Koenker, R. (2004). Quantile regression for longitudinal data. Journal of Multivariate Analysis, 91(1), 74–89. https://doi.org/10.1016/j.jmva.2004.05.006
Kouladoum, J.-C., Ngouhouo, I., & Wendji Miamo, C. (2023). Wellbeing in Africa: The role of technology transfer. Technology in Society, 73, Article 102238. https://doi.org/10.1016/j.techsoc.2023.102238
Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1–28.
Machado, J. A. F., & Santos Silva, J. M. C. (2019). Quantiles via moments. Journal of Econometrics, 213(1), 145–173. https://doi.org/10.1016/j.jeconom.2019.04.009
Meniago, C., & Asongu, S. A. (2018). Revisiting the finance-inequality nexus in a panel of African countries. Research in International Business and Finance, 46, 399–419. https://doi.org/10.1016/j.ribaf.2018.04.012
Mialou, A., Amidzic, G., & Massara, A. (2017). Assessing countries’ financial inclusion standing – A new composite index. Journal of Banking and Financial Economics, 2(8), 105–126. https://doi.org/10.7172/2353-6845.jbfe.2017.2.5
Mora-Rivera, J., & García-Mora, F. (2021). Internet access and poverty reduction: Evidence from rural and urban Mexico. Telecommunications Policy, 45(2), Article 102076. https://doi.org/10.1016/j.telpol.2020.102076
Njangang, H., Beleck, A., Tadadjeu, S., & Kamguia, B. (2022). Do ICTs drive wealth inequality? Evidence from a dynamic panel analysis. Telecommunications Policy, 46(2), Article 102246. https://doi.org/10.1016/j.telpol.2021.102246
Odusola, A. (2017). Fiscal space, poverty and inequality in Africa. African Development Review, 29(S1), 1–14. https://doi.org/10.1111/1467-8268.12229
Omar, M. A., & Inaba, K. (2020). Does financial inclusion reduce poverty and income inequality in developing countries? A panel data analysis. Journal of Economic Structures, 9, Article 37. https://doi.org/10.1186/s40008-020-00214-4
Opoku, E. E. O., & Aluko, O. A. (2021). Heterogeneous effects of industrialization on the environment: Evidence from panel quantile regression. Structural Change and Economic Dynamics, 59, 174–184. https://doi.org/10.1016/j.strueco.2021.08.015
Park, C.-Y., & Mercado, R. (2018). Financial inclusion, poverty, and income inequality. The Singapore Economic Review, 63(1), 185–206. https://doi.org/10.1142/S0217590818410059
Pesqué‐Cela, V., Tian, L., Luo, D., Tobin, D., & Kling, G. (2021). Defining and measuring financial inclusion: A systematic review and confirmatory factor analysis. Journal of International Development, 33(2), 316–341. https://doi.org/10.1002/jid.3524
Piketty, T. (1997). The dynamics of the wealth distribution and the interest rate with credit rationing. Review of Economic Studies, 64(2), 173–189. https://doi.org/10.2307/2971708
Powell, D. (2020). Quantile treatment effects in the presence of covariates. The Review of Economics and Statistics, 102(5), 994–1005. https://doi.org/10.1162/rest_a_00858
Riggins, F., & Dewan, S. (2005). The digital divide: Current and future research directions. Journal of the Association for Information Systems, 6(12), 298–337. https://doi.org/10.17705/1jais.00074
Sarkodie, S. A., & Strezov, V. (2019). Economic, social and governance adaptation readiness for mitigation of climate change vulnerability: Evidence from 192 countries. Science of The Total Environment, 656, 150–164. https://doi.org/10.1016/j.scitotenv.2018.11.349
Selim, P. M. B., & Güngör, H. (2021). Inequality and financial development: Evidence from selected MENA region countries. International Journal of Finance and Economics, 26(2), 2732–2747. https://doi.org/10.1002/ijfe.1930
Seven, U., & Coskun, Y. (2016). Does financial development reduce income inequality and poverty? Evidence from emerging countries. Emerging Markets Review, 26, 34–63. https://doi.org/10.1016/j.ememar.2016.02.002
Solt, F. (2020). Measuring income inequality across countries and over time: The standardized world income inequality database. Social Science Quarterly, 101(3), 1183–1199. https://doi.org/10.1111/ssqu.12795
Thornton, J., & Di Tommaso, C. (2020). The long-run relationship between finance and income inequality: Evidence from panel data. Finance Research Letters, 32, Article 101180. https://doi.org/10.1016/j.frl.2019.04.036
United Nations. (2020). World social report 2020: Inequality in a rapidly changing world. https://www.un.org/development/desa/dspd/wp-content/uploads/sites/22/2020/02/World-Social-Report2020-FullReport.pdf
UNU-WIDER. (2023). World Income Inequality Database – WIID. https://www.wider.unu.edu/database/world-income-inequality-database-wiid
Van Dijk, J. A. G. M. (2005). The deepening divide: Inequality in the information society. Sage Publications. https://doi.org/10.4135/9781452229812
World Bank. (n.d.). World development indicators. https://databank.worldbank.org/source/world-development-indicators
Yin, Z. H., & Choi, C. H. (2023). Does digitalization contribute to lesser income inequality? Evidence from G20 countries. Information Technology for Development, 29(1), 61–82. https://doi.org/10.1080/02681102.2022.2123443
Zhang, Q., & Posso, A. (2019). Thinking inside the box: A closer look at financial inclusion and household income. The Journal of Development Studies, 55(7), 1616–1631. https://doi.org/10.1080/00220388.2017.1380798
Zhang, R., & Ben Naceur, S. (2019). Financial development, inequality, and poverty: Some international evidence. International Review of Economics & Finance, 61, 1–16. https://doi.org/10.1016/j.iref.2018.12.015