The role of financial inclusion in reducing household poverty: insights from Eastern Indonesia

<p>This study investigates the roles of financial inclusion in alleviating both absolute poverty and multidimensional poverty at the household level in Eastern Indonesia, a region characterized by persistent inequality and limited access to financial infrastructure. Using microdata from the 2024 National Socio-Economic Survey (Susenas) covering 100,113 households across 16 provinces, we apply probit and instrumental variable probit (IV Probit) models to address endogeneity concerns. Financial inclusion index (FII) and Households Multidimensional poverty index (HMP) indices are constructed using the Multiple Correspondence Analysis (MCA) approach. The findings reveal that financial inclusion significantly reduces both forms of poverty, with stronger effects observed once endogeneity is accounted for. Credit access emerges as the most influential driver of poverty reduction, while savings and insurance show weaker and mixed effects. The results highlight the urgent need to expand inclusive financial services in rural and geographically dispersed areas, where physical access barriers remain critical. By focusing on household microdata and applying a multidimensional poverty lens, this study makes a novel contribution to the literature on financial inclusion, poverty, and provides policy-relevant evidence for achieving Sustainable Development Goals (SDG 1 and SDG 10).</p> <p>This study demonstrates how financial inclusion significantly reduces both absolute and multidimensional poverty among households in Eastern Indonesia, a region marked by persistent inequality and limited access to financial services. Using microdata from over 100,000 households and an Instrumental Variable Probit model, the research confirms that financial inclusion has a stronger poverty-reducing effect once endogeneity—particularly transaction costs—is addressed. Access to credit is shown to be the most influential component, while savings and insurance also contribute to improved welfare. By incorporating both consumption-based and multidimensional poverty measures, the study provides a holistic understanding of how financial inclusion enhances education, health, and living standards in addition to income. The findings also reveal important spatial and gender differences: financial inclusion is most effective in rural areas, while female-headed households experience stronger multidimensional benefits. The study advances the literature by offering rigorous, household-level evidence from one of Indonesia’s least studied regions. Further, these results directly support Indonesia’s financial inclusion agenda and contribute to global efforts to achieve SDG 1 and SDG 10.</p>