Doctoral thesis of philosophy essays on financial inclusion, poverty and inequality

Essays on Financial Inclusion, Poverty and Inequality A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Quanda Zhang Master of Economics (Research), Zhejiang University of Finance & Economics B.A (Economics), Henan University of Technology B.A (English Literature), Henan University of Technology School of Economics Finance and Marketing College of Business RMIT University July 2018 Declaration I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the project is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed Quanda Zhang July 2018 ii Acknowledgements Three years ago, without knowing anyone and never having lived overseas, I arrived in Melbourne for my PhD Being far away from family and friends, my life is very challenging Gratefully, God reminds me that He is with me: …Be strong and courageous Do not be frightened, and not be dismayed, for the Lord your God is with you wherever you go (Joshua 1:9) and He will look after me: Casting all your anxieties on him, because he cares for you (1 Peter 5:7) Therefore, first and foremost, I would like to thank God for His constant companionship, blessings and love during the past three years I give all praise, honour and glory to the Lord Jesus Christ for His richest grace and mercy for the accomplishment of my studies While I alone am responsible for this thesis, it is nonetheless a product of years of interaction with, and inspiration by, a large number of colleagues and friends For this reason, I wish to express my sincere gratitude to everyone whose comments, questions, criticism, support and encouragement—both personal and academic—have left a mark on this work I also wish to thank the institutions that have supported me during my work on this thesis Regrettably, but inevitably, the following list of names will be incomplete I hope that those who are missing will forgive me and will still accept my sincere appreciation for their influence on my work I wish to thank: Associate Professor Alberto Posso and Associate Professor George Tawadros for their excellent academic supervision and personal support throughout all of my years at RMIT University—I have been exceptionally blessed to have you as my advisors; Eng Lin and May Heah for their genuine love and care over many years, and for numerous conversations that have shaped my horizon in more ways than I am consciously aware of; Professor Simon Feeny, Professor Roslyn Russell and Dr Nobu Yamashita for comments and suggestions on the thesis; Professor Tim Fry and Dr Janneke Blijlevens for their support for my RMIT Research Award; brothers and sisters in Christ – John and Yvonne Huynh, Chris and Rose Siriweera, Mak and Amanda Wee, iii Costa and Mia Englezos, Joseph and Mailyn Teo, Jason Ling, Darren Hindle, Andrew Walley, Michael Raines, Francis Ha, Louisa Thong, Justin Ji, Kenneth Kwan, Celia Yu, Lauren Walley, James and Ellie Kim, Winston and Grace Wong, Robert Liang, Stella and Galton Gao, Stephen Moody, Sandra Lee, Melly Tjoa, Lindiana Yusuf, David Evans, Felicia Grant, Kimberly Drake, Jonathan Loufik, Erwin Yii, Isaac Jones, Samuel Moody, Benjamin Yong, Amy Cheong, Mira Adly, Gabrielle Wu and Annie Zhang; and PhD friends Jozica Kutin, Trong Anh Trinh, Giang Pham, Yalong Yang and Haibin Yang for their support and encouragement My exceptional and grateful thanks are also accorded to my beloved parents, Xiaogen and Guoying Zhang My gratitude to them is beyond words I am also grateful to RMIT University for providing me with the scholarship and grants for my studies, and to the Development Studies Association (DSA) in the United Kingdom for giving me the travel grant with which I travelled to Bradford and presented a paper at the DSA’s 2016 Annual Conference ~~ I DEDICATE THIS THESIS TO MY LORD, GOD, AND SAVIOUR JESUS CHRIST ~~ iv Publications Journal articles 1) Part of Chapter has been published as: Zhang, Q (2017) Does microfinance reduce poverty? Some international evidence The BE Journal of Macroeconomics, 17(2) 2) Part of Chapter has been published as: Zhang, Q., & Posso, A (2017) Microfinance and gender inequality: Crosscountry evidence Applied Economics Letters, 24(20), 1494–1498 3) Part of Chapter has been published as: Zhang, Q., & Posso, A (2017) Thinking inside the box: A closer look at financial inclusion and household income Journal of Development Studies, 1–16 Working articles 1) Part of Chapter has been submitted to The European Journal of Development Research and is currently under review Conference presentations 1) Chapters and were presented at the Development Studies Association 2017 Annual Conference hosted by the University of Bradford (Bradford, United Kingdom) in September 2017 2) Chapter was presented at Beyond Research—Pathways to Impact Conference hosted by RMIT University (Melbourne, Australia) in February 2017 v Media articles The article based on Chapter 2, entitled ‘Yes, microlending reduces extreme poverty’, was originally published in The Conversation and was republished at the World Economic Forum 1) Zhang, Q (2017, 26 June) Yes, microlending reduces extreme poverty The Conversation Retrieved from https://theconversation.com/yes-microlendingreduces-extreme-poverty-78088 [Accessed 09 July 2018] 2) Zhang, Q (2017) How microlending could end extreme poverty World Economic Forum Retrieved from https://www.weforum.org/agenda/2017/06/ how-microlending-could-end-extreme-poverty [Accessed 09 July 2018] The article based on Chapter 3, entitled ‘How microfinance reduces gender inequality in developing countries’, was originally published in The Conversation and was republished in the Asia Times 1) Zhang, Q., & Posso, A (2017, March) How microfinance reduces gender inequality in developing countries The Conversation Retrieved from https://theconversation.com/how-microfinance-reduces-gender-inequality-indeveloping-countries-73281 [Accessed 09 July 2018] 2) Zhang, Q., & Posso, A (2017, March) How microfinance reduces gender inequality Asia Times Retrieved from http://www.atimes.com/article/ microfinance-reduces-gender-inequality/ [Accessed 09 July 2018] vi Honours and Awards • RMIT Research Awards Category: RMIT Prize for Research Impact—Higher Degree by Research (Enterprise), February 2018 • RMIT School of Economics, Finance and Marketing Awards Category: Team/Collaborative Learning and Teaching Award, December 2016 vii Contents Acknowledgements iii Publications v Honours and Awards vii Contents viii List of Figures x List of Tables xi List of Abbreviations xii Abstract xiv Chapter 1: Introduction 1.1 Background 1.1.1 Have we done enough against poverty? 1.1.2 Gender and poverty: are women poorer than men? 1.1.3 Role of financial inclusion—particularly microfinance—in reducing poverty and gender inequality 1.2 Research aims and objectives 1.3 Methodology 1.4 Thesis structure Chapter 2: Does Microfinance Reduce Poverty? 2.1 Introduction 2.2 Literature review 11 2.2.1 Financial development, poverty and income inequality 11 2.2.2 Microfinance, poverty and income inequality 13 2.3 Methodology and model 16 2.4 Data 18 2.5 Empirical results 24 2.6 Conclusion 29 Appendix 2.1 31 Chapter 3: Does Microfinance Improve Gender Equality? 32 3.1 Introduction 32 3.2 Literature review 34 3.3 Methodology and model 36 3.4 Data 37 3.4.1 Dependent variable 37 3.4.2 Independent variable 37 3.5 Empirical results 38 3.6 Conclusion 41 Chapter 4: Multidimensional Financial Exclusion Index 43 4.1 Introduction 43 4.2 Conceptualisation 45 4.3 Methodology 46 4.4 Empirical exercise 48 4.5 Conclusion 55 viii Appendix 4.1 56 Chapter 5: Does Financial Inclusion Increase Household Income? 57 5.1 Introduction 57 5.2 Data and model 59 5.3 Empirical strategy 61 5.4 Empirical results 65 5.4.1 Ordinary least squares and quantile regressions 65 5.4.2 Robustness test 68 5.5 Discussions 76 5.6 Conclusion 77 Appendix 5.1 79 Chapter 6: Conclusion 80 6.1 Introduction 80 6.2 Main findings and policy implications 80 6.3 Contributions 81 References 83 ix List of Figures Figure 1.1: Poverty in China and India Figure 1.2: Poverty around the world (2013) Figure 2.1: Total clients and poorest clients of MFIs in 2013 (region level) 21 Figure 4.1: MFEI by Chinese province (2011) 51 Figure 4.2: GDP per capita (RMB) by Chinese province (2011) 52 Figure 4.3: MFEI by age (2011) 53 Figure 4.4: MFEI by level of educational attainment 54 Figure 4.5: Drivers of financial exclusion in China (2011) 54 Figure 5.1: Quantile plot 68 Figure 5.2: Histogram of matched sub-samples along common support from PSM 69 x Chapter 6: Conclusion 6.1 Introduction This chapter highlights the main empirical findings emerging from this thesis, and the results are used to provide insights into the role of financial inclusion—particularly microfinance—in improving people’s lives The chapter is organised as follows Section 6.2 highlights the main findings and outlines policy implications, and Section 6.3 describes the contributions of this thesis 6.2 Main findings and policy implications This thesis investigates four research questions: (1) Does microfinance reduce poverty? (2) Does microfinance reduce gender inequality? (3) How does one develop a microeconomic-level index for financial inclusion? (4) Does financial inclusion increase household income? The findings of the thesis can be summarised as follows: Microfinance has a negative effect on poverty Women’s participation in microfinance is associated with a reduction in gender inequality across countries In China, the gender of the household head is unlikely to play a role in determining access to financial services However, education, ethnicity and age are likely to play significant roles Financial inclusion has a strong positive effect on household income and helps to reduce income inequality in China As a result, the empirical findings of this thesis suggest the following policy prescriptions: National governments and international development agencies should continue to promote microfinance as a tool for reducing poverty Governments and international organisations in developing countries should continue to promote microfinance to indirectly empower women However, they should take into account that microfinance does not automatically empower women Cultural and country-specific factors play a key role in determining how 80 microfinance interacts with gender inequality, and these factors should be considered when assessing the effect of microcredit in the developing world In China, policymakers and regulators should continue to promote financial inclusion to improve household welfare and reduce income inequality For example, expanding the provision of financial services though government sponsored programs in rural and depressed urban areas can potentially improve household earnings Government could accelerate efforts to facilitate the use of fintech technologies such as electronic currencies and e-banking amongst the excluded The existence of widespread mobile coverage and access to smart phones suggests that an increasing number of excluded individuals could potentially access financial services electronically Continued efforts to make ICT infrastructure effective, reliable and safe could, therefore, go a long way toward promoting financial inclusion For this work successfully, government needs to carefully look at banking fee structures to ensure that they are fair and that they not price-out a significantly high proportion of the poor Introducing transparency requirements for the comparability of account fees and payment services can help key the banking system to stay fair and honest Financial literacy programs are useful in creating a demand-side approach to financial inclusion Individuals can learn about transaction and savings accounts, interest rates and using e-banking technologies 6.3 Contributions The contributions of this thesis are fourfold First, using a unique cross-country panel data set covering 73 countries between 1998 and 2008, Chapter complements existing studies by finding that microfinance has a negative effect on poverty at the macroeconomic level As a result of the unavailability of reliable macroeconomic-level data on microfinance, very few recent studies have investigated the effect of microfinance on poverty at the macroeconomic level Second, Chapter is the first empirical investigation to analyse the effect of microfinance on gender inequality It uses a unique cross-country data set for 64 developing economies from 2010 to 2014 It shows that women’s participation in 81 microfinance is significantly associated with a reduction in gender inequality, but that cultural factors are likely to influence this relationship Third, using a national representative household finance survey data from China, Chapter constructs the first microeconomic-level index for financial exclusion— namely, the MFEI This index reveals that the gender of the household head is unlikely to play a role in determining access to financial services However, education, ethnicity and age play significant roles Hitherto, the existing literature lacks a multidimensional index that brings together information on financial inclusion at the microeconomic level Finally, using the MFEI discussed in Chapter 4, Chapter is the first empirical study to investigate the effect of financial inclusion on household income at the microeconomic level It finds that financial inclusion has a strong positive effect on household income, and this effect can be found across all households with different levels of income Further, it finds that low-income households benefit more from financial inclusion than high- and mid-level income households As a result, financial inclusion helps to reduce income inequality 82 References Acemoglu, D., & Robinson, J A (2000) Why did the West extend the franchise? 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The contributions of this thesis are fourfold First, it shows that microfinance has a negative effect on poverty at the macroeconomic level Second, it demonstrates that women’s participation in... question in the debate on the effect of microfinance with respect to reducing poverty In a wide range of disciplines, poverty is a widely discussed topic, and opinions regarding its explanations and