Financial inclusion as a pathway to welfare enhancement and income equality: Micro-level evidence from Nigeria

While the importance of financial inclusion as a means of poverty and income inequality reduction has long been recognised, the paths to welfare enhancement and income equality through financial inclusion remain partially acknowledged. Using micro-level data on 1 750 rural Nigerian households, this study examines the finance-welfare nexus by constructing a multi-variable financial inclusion index. The results first show that financial inclusion exerts a strong positive influence on household welfare. However, the decomposition analysis shows that middle- and high-income households gain more from financial inclusion in comparison to the targeted low-income households. Second, informal livelihood strategies, such as environmental resource extraction, crops, and livestock production, revealed reduced welfare disparities across income distributions. Therefore, for financial inclusion to alleviate welfare inequality and ensure income convergence, rural financial markets must be redesigned to allow wider access to credit, specifically for low-income and vulnerable households.