Financial literacy, financial inclusion, income inequality and economic uncertainty in developing countries

Financial inclusion is a strategic approach when confronting social issues such as rising income inequality, poverty and economic uncertainty. However, nearly one-third of the world's population is still denied access to financial services. Financial literacy remains disappointingly low and become a persistent obstacle to financial inclusion. Additionally, the ageing population has recently impacted society, which is less open to financial institutions and more susceptible to various types of risk. A digital gap also prevents these disadvantaged populations from fully participating with the higher socioeconomic groups. This situation may result in social exclusion and missed economic opportunities. The first objective is to investigate the relationship between financial literacy and financial inclusion. The empirical results of the cross-sectional threshold model suggested a no threshold or no inverted U-shaped effect of financial literacy on financial inclusion. Following that, quantile regression techniques are used in this work to examine the impact of financial knowledge on various quantiles of the conditional distribution. The outcomes suggest that the variable of financial literacy has no substantial influence on financial inclusion. The second objective is to examine the role of the ageing population in moderating the impact of financial inclusion on income inequality. GMM method reveals that financial inclusion and the ageing population are not predictors of income distribution. However, the combined effect of financial inclusion and an ageing population on the income gap is significant. Meanwhile, the empirical findings of the panel quantile regression technique demonstrate that financial inclusion and an ageing population are crucial factors in reducing income inequality at a low quantile level. The ageing population moderates the relationship between financial inclusion and income inequality, particularly regarding the rise of income disparity at the low quantile (low income inequality). However, the parameter of the interaction effect between financial inclusion and the ageing population decreased at the upper quantile (higher income inequality). The third objective is to analyse the effect of digitalisation on inclusion-economic uncertainty nexus. GMM estimators indicate that digitalisation contributes to a rise in economic uncertainty. Nevertheless, financial inclusion is an insignificant determinant of economic uncertainty. The interaction term between financial inclusion and digitalisation is an insignificant determinant of economic uncertainty. Meanwhile, the quantile regression results suggest that financial inclusion is crucial for reducing economic uncertainty at a low level of economic uncertainty. Additionally, digitalisation contributes to an increase in economic uncertainty at the low and high levels of economic uncertainty (at low and high distribution quantiles). This study also discovered that the interaction effect between financial inclusion and digitalisation is more significant when uncertainty increases, particularly at the low economic uncertainty level. As a policy recommendation, it is crucial to prioritise skill development and education to enhance financial literacy. Financial institutions should develop inclusive financial products tailored for older adults to ensure their participation in the formal financial system. Financial institutions also must establish a secure digital finance framework to minimise risks and build trust in financial transactions. This comprehensive approach will create an inclusive financial environment, reducing inequality and promoting economic stability.

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