An economic study of financial inclusion and poverty reduction in Nigeria

Abstract

This study empirically examines the effect of financial inclusion on poverty reduction in Nigeria using annual time-series data spanning 1981–2022. To achieve the objectives, secondary data were obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin, the National Bureau of Statistics and the World Development Indicators. The Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests were used to establish the order of integration of the series, while the Autoregressive Distributed Lag (ARDL) bounds testing approach to co-integration was used to estimate the short-run and long-run relationships. Financial inclusion was measured by two indicators: bank branches in rural areas (BBR) and loans to rural area branches of commercial banks (LRACB). The unit root results show that the variables are a mixture of I(0) and I(1) and the bounds test confirms a stable long-run relationship among the variables. In the short run, bank branches in rural areas is associated with a rise in poverty on impact but with poverty-reducing effects in the first and third lag periods, while loans to rural areas reduce poverty on impact but are associated with higher poverty across all three lag periods. In the long run, both indicators of financial inclusion are positively related to poverty: the effect of bank branches is not statistically significant, but the effect of rural loans is positive and statistically significant. This indicates that, as currently structured, financial inclusion has not translated into long-run poverty reduction in Nigeria. Real GDP growth reduces poverty in both the short and long run, while the effects of inflation, education and per capita income are mixed across the two horizons. The study concludes that expanding rural bank branches and rural lending, without addressing structural bottlenecks such as high transaction costs, elite capture of rural branches and credit misallocation, will not by itself reduce poverty in Nigeria. The study recommends that the banking sector, in collaboration with monetary authorities, redesign rural credit delivery to prioritize the productive poor and complement branch expansion with targeted financial literacy and low-cost transaction mechanisms.