Effect of financial exclusion on poverty: issues of measurement and relationships in Ghana

Abstract

Financial services play an important role in the development of national economies. Studies have shown that financial inclusion promotes economic growth. However, the concept of financial exclusion dynamics has received little attention. The study thus examined the effect of financial exclusion on poverty in Ghana. Specifically, the study estimates the classes of financial exclusion (incidence, depth, and severity); determined the association between classes of financial exclusion and poverty using Chi-Square independence test and finally examined the effect of the classes of financial exclusion on poverty using ordinary least square, instrumental variable estimation, and conditional mixed process. Due to the endogeneity of financial exclusion, the study employed supply-side variables-type of the financial institution and insurance as instruments to remedy the endogeneity problem. The study found a high financial exclusion in Ghana, especially, Northern Region, Upper West, Upper East, and the Volta Region. Further, the study established that poor households are mostly associated with financial exclusion. Besides, incidence, depth, and severity of financial exclusion hurt household heads consumption poverty. Again, the severity of financial exclusion generally dominates the depth of financial exclusion whereas the depth of financial exclusion generally dominates the incidence of financial exclusion. Besides, the study, therefore, recommends inclusive finance in Ghana especially the Northern region, Upper West, Upper East, and Volta region. Again, the study recommends the education of household heads, and as well as providing them with employment opportunities as these decrease household head poverty, and financial exclusion