Financial Inclusion and Its Effect on Poverty Dynamics in Uganda: A Time-Series Analysis (2000–2022)

Abstract

This study examines the effect of financial inclusion on poverty dynamics in Uganda over the period 2000–2022, focusing on three key dimensions: financial services availability (FSA), penetration (FSP), and usability (FSU). Using annual time-series data sourced from the Bank of Uganda and World Bank Development Indicators, the study applies the Johansen Cointegration technique and the Vector Error Correction Model (VECM) to examine both long-run and short-run relationships. The findings reveal that financial services availability and penetration exert significant positive long-run effects on poverty reduction, indicating that increased access to banking infrastructure and financial outreach contributes to improved welfare outcomes. Financial services usability exhibits a significant negative long-run relationship with poverty, suggesting that effective utilization of financial services plays a critical role in reducing poverty levels. In the short run, financial services availability significantly reduces poverty, while usability shows a positive short-run effect, reflecting transitional adjustment dynamics. The error correction term confirms convergence towards long-run equilibrium. Diagnostic tests validate the robustness of the model. The study concludes that financial inclusion is multidimensional and that its effectiveness in reducing poverty depends not only on access but also on the depth of usage of financial services.