Financial inclusion and multidimensional poverty alleviation: the moderating role of governance efficiency in Asian countries

Abstract

This study investigates two primary research questions: (1) What are the specific impacts of digital versus traditional financial inclusion on reducing multidimensional poverty in Asian countries? (2) How does governance efficiency influence the relationship between financial inclusion and poverty alleviation? Persistent multidimensional poverty in the region underscores deep-rooted structural challenges, with financial exclusion worsening deprivations in income, health, education, and living standards. To address these questions, this study analyses the effect of traditional financial inclusion (TFII) and digital inclusive finance (DIFI) on multidimensional poverty alleviation (MPAI) across 20 Asian economies from 2010 to 2021, considering governance efficiency (GEI) as a moderating factor. Composite indices for TFII, DIFI, GEI, and MPAI are constructed using principal component analysis (PCA). The econometric analysis employs Feasible Generalised Least Squares (FGLS) and Driscoll–Kraay standard-error (DKSE) estimators as complementary specifications to address cross-sectional dependence, heteroscedasticity, and autocorrelation in the panel data. Findings reveal that digital financial inclusion consistently has a stronger and more significant effect on poverty reduction than traditional methods. Moreover, we find that governance efficiency not only directly reduces multidimensional poverty but also significantly enhances the effectiveness of both types of financial inclusion. Well-established institutional and regulatory frameworks amplify their positive effects, while weak governance can render traditional credit expansion counterproductive by fostering over-indebtedness. These insights underscore the importance of integrating digital financial innovations with robust governance to advance progress towards the Sustainable Development Goals (SDGs) in Asia.