Does financial development contribute to poverty reduction?

The article examines the contribution of financial development to poverty reduction in developing countries. Building on earlier research which has established links between financial development and economic growth, and between economic growth and poverty reduction, the article tests for a causal process linking financial sector growth and poverty reduction. The empirical results indicate that, up to a threshold level of economic development, financial sector growth contributes to poverty reduction through the growth enhancing effect. The impact of financial development on poverty reduction will be affected, however, by any change in income inequality resulting from financial development.