Does Financial Structure Matter for Poverty? Evidence from Developing Countries

Abstract

Although there has been research looking
 at the relationship between the structure of the financial
 system and economic growth, much less work has dealt with
 the importance of bank-based versus market-based financial
 systems for poverty and income distribution. Empirical
 evidence has indicated that the structure of the financial
 system has little relevance for economic growth, suggesting
 that the same could be true for poverty since growth is an
 important driver in reducing poverty. Some theories,
 however, claim that, by reducing information and transaction
 costs, the development of bank-based financial systems could
 exert a particularly large impact on the poor. This paper
 looks at a sample of 47 developing economies from 1984
 through 2008. The results suggest that when institutions are
 weak, bank-based financial systems are better at reducing
 poverty and, as institutions develop, market-based financial
 systems can turn out to be beneficial for the poor.