Financial Development and Poverty Reduction: Exploring the Links between the Issues Using Evidence from Bangladesh

Abstract

This paper estimates the impact of financial development and financial instability on poverty reduction. From a time series data set of Bangladesh in the period between 1974 and 2013, this study finds a significant and positive relationship between the issues. Results suggest that financial development reduces poverty directly by providing greater credit access along with savings opportunity for the poor and indirectly via promoting economic growth. Notwithstanding that the financial development positively impacts poverty reduction; financial instability along with financial development is adverse to poverty reduction process. The more interesting finding is that the private credit ration has substantially stronger impact on the income of the poor, compare to the findings of similar studies relating to low-income countries, and it may be for the presence of ample micro-credit programs in Bangladesh.