The Potency of Financial Inclusion for Income Inequality Reduction in BRICS Economies: Does Institutional Quality Matter?

Abstract

While the global economy has witnessed robust economic performance over the past few years, millions of households remain financially deprived. This indicates that universal access to financial services is critical for the global community to achieve the United Nations’ sustainable development goals (SDGs). Although there is a burgeoning body of literature on the nexus between financial inclusion and income inequality, empirical evidence on the contribution of financial inclusion and institutional quality to income inequality remains sparse. This research, therefore, examines the effect of financial inclusion and institutional quality on income inequality in Brazil, Russia, India, China, and South Africa (BRICS) economies from 2004 to 2015. The empirical analysis employed the cross-sectional autoregressive distributed lag (CS-ARDL) and common correlated effects mean group (CCEMG) techniques to obviate cross-sectional dependency and heterogeneity concerns. The empirical outcome demonstrates that financial inclusion promotes income inequality reduction in BRICS economies in the long and short run. Additionally, improvements in institutional quality further enhance the accessibility and usage of financial services by financially excluded individuals, thereby fostering equitable income distribution in the BRICS countries. Based on these findings, BRICS economies need to increase their awareness of the available financial services, effective microfinance, financial capability, and infrastructural access in rural areas to improve financial inclusivity and thus promote equitable income distribution. JEL Classification D02, D33, E02, G21, O15