Financial globalization, Poverty, and inequality in developing countries: The moderating role of Fintech and financial inclusion

Abstract

As financial globalization continues to evolve, it has played a pivotal role in the development of financial sectors in developing countries, enhancing efficiency and fostering competition. However, this trend has also raised concerns regarding its socio-economic impacts, particularly in relation to poverty and inequality. In this context, the emergence of financial technology (Fintech) and targeted financial inclusion initiatives has marked a significant turning point in addressing these challenges. This comprehensive study investigates the intricate dynamics between foreign bank entry, Fintech innovations, and financial inclusion, assessing their combined effects on poverty and inequality across 108 developing countries. Utilizing an advanced panel regression model backed by Panel-Corrected Standard Errors (PCSE) and Feasible Generalized Least Squares (FGLS) estimation techniques, we reveal that the relationship between foreign bank entry and socio-economic outcomes is multifaceted and influenced by the moderating roles of Fintech and financial inclusion initiatives. Our findings indicate that while the initial introduction of foreign banks may initially exacerbate poverty levels, their interaction with robust financial inclusion strategies and advanced Fintech solutions can significantly alleviate poverty and inequality. The study results indicate that, for every 1% increase in the interaction of Fintech with foreign banks, poverty has decreased by approximately 0.017%. Interestingly, the presence of Automated Teller Machines (ATMs) demonstrates a countervailing effect, mitigating the adverse impacts of foreign bank operations on income inequality. Moreover, we show that the effectiveness of Fintech in reducing inequality is closely linked to the extent of foreign bank penetration, highlighting a duality of effects where the advantages and disadvantages of foreign bank presence become increasingly pronounced in the era of Fintech. These insights underscore the imperative for policymakers to create an environment that not only promotes financial inclusion but also leverages Fintech innovations to optimize the opportunities presented by foreign bank entry in combating poverty and inequality.