EXPLORING FINANCIAL INCLUSION AND POVERTY DYNAMICS IN PAKISTAN: EVIDENCE FROM PRINCIPAL COMPONENT ANALYSIS BASED INDEXES

Abstract

This study investigates the impact of financial inclusion on poverty dynamics in Pakistan over the period 2002-2021. Using annual data, we construct composite indexes of financial inclusion based on access and usage dimensions through principal component analysis (PCA), ensuring a comprehensive coverage of supply and demand side indicators. The relationship between financial inclusion and poverty is examined using time series regression techniques, with robust checks in different specifications. The results show that greater financial inclusion - mainly through the improved usage of financial services - significantly reduces poverty levels. Access indicators such as branch and ATM density also contribute positively, but measures related to usage (deposit accounts, private sector credit and digital transactions) exert a stronger effect. Control variables, including exchange rate, financial development and loan rates, highlighting the broader macroeconomic context that influences the dynamics of poverty. The study contributes to the growing literature, offering a specific financial inclusion rate of Pakistan and providing empirical evidence on the role of inclusive finances in the relief of poverty. Political implications emphasize the need to strengthen digital finances, expand dissemination and promote women's participation in the financial system to obtain sustainable results.