An Analytical Examination of the Effects of Financial Development on Poverty

Financial development is one of the pillars of economic development and growth at national level. While it improves revenue at macro level, its effect on distribution of wealth or income inequality and poverty is unknown. Therefore, the present paper is an analytical attempt to analyze the effects of financial development on poverty along with the factors effective in poverty in selected member countries of the Organization of Islamic Cooperation (formerly Organization of the Islamic Conference). By this study, the author hopes to take a small step towards alleviation of poverty in the Islamic countries that claim to be the leaders of justice and eradication of poverty. Based on the findings, ineffectiveness of the financial development index “ratio of private sector credit to gross domestic production” and the positive effect of government consuming spending on poverty are indicatives of state control on the economy in the selected Muslim countries. Expectedly, the private sectors in these countries is smaller and thinner than their public sectors. It is argued that the productivity of the credits to the private sector, in the countries under study, is not enough to affect distribution of wealth and poverty in return. Moreover, ineffectiveness of the other indices of financial development (ratio of liquidity to GDP) and the positive effect of inflation rate on poverty show that liquidity in Muslim countries has led to a higher inflation rate, inequality, and spread of poverty. Finally, the limited effect of the combined index of financial development in the Islamic countries on poverty indicates inefficiency of financial sector in these countries.