Does Financial Inclusion Reduce Income Inequality and Poverty? Evidence from Eastern and Western Indonesia

The nexus between financial inclusion, income inequality, and poverty remains debated, especially in developing economies with diverse regional contexts. This study examines the impact of financial inclusion on inequality and poverty across 33 Indonesian provinces using panel data. We estimate Fixed-Effects and Generalized Method of Moments (GMM) models to address unobserved heterogeneity and potential endogeneity. Financial inclusion is proxied by deposits per capita, while key outcomes are provincial income inequality and poverty rates. Results show a significant negative association between financial inclusion and both inequality and poverty. Regional heterogeneity is evident: the poverty-reducing effects of financial inclusion are stronger in Eastern Indonesia than in the more developed Western region. These findings highlight the need for region-specific policies that expand affordable financial access, strengthen financial literacy, and deepen financing for micro, small, and medium enterprises (MSMEs) to support inclusive growth. Future research should assess the roles of fintech and Islamic finance, evaluate how financial inclusion shapes MSME performance, and rigorously examine the effectiveness of Indonesia’s National Strategy for Financial Inclusion to inform progress toward the Sustainable Development Goals.