Digital Financial Inclusion, Poverty and Green Growth: Evidence from Developing Countries

The rapid expansion of Digital Financial Inclusion (DFI) in developing economies has been viewed as a transformative force for promoting economic development and social welfare. Yet, despite its growth, parallel improvements in key macroeconomic and sustainability outcomes—particularly poverty reduction and environmental quality—have remained limited. Against this backdrop, this study critically examined the economic and environmental implications of DFI, focusing on its causal effects on poverty and green growth in developing countries. Recognising the conceptual and empirical shortcomings of existing DFI measures, the study constructed a novel composite DFI index based on the generalised mean aggregation approach. This index captures the multidimensional nature of DFI, providing a more intuitive and rigorous measure for cross-country and intertemporal comparative analysis. Empirical findings reveal robust relative expansion of DFI in Africa and Asia, where traditional financial exclusion remains widespread. Using panel data from 2014 to 2021, the study further employed fixed-effects and two-stage least squares estimations to identify the effect of DFI on monetary poverty by employing the novel DFI measure. The results demonstrate a statistically significant poverty-reducing effect of DFI, primarily through labour market channels – particularly income generation and employment expansion in the services sector. The analysis further reveals heterogeneity across institutional structures, with stronger poverty-alleviation effects in countries/regions where non-bank financial institutions dominate the digital finance landscape. Extending the analysis, spatial econometric models are applied to assess the impact of DFI on green growth. Findings indicate that DFI promotes green growth directly and through spatial spillovers observed through clean technologies diffusion across neighbouring economies. The study makes conceptual, methodological, and empirical contributions to the literature on DFI, poverty, and sustainable development. It offers policy guidance on inclusive digital finance frameworks, strengthening regulatory oversight, and enhancing international cooperation to align financial innovation with poverty reduction and environmental sustainability.