Examining the Connection Between Financial Inclusion and Income Inequality in Indonesia

This study examines the impact of financial inclusion on income inequality across 33 provinces in Indonesia from 2015 to 2023, while controlling for human development and investment-related factors. Specifically, it investigates the effects of the Financial Inclusion Index (FII), Human Development Index (HDI), foreign investment (FI), and domestic investment (DI) on provincial income inequality. This study used balanced-panel data for each province and year. Employing a dynamic panel data approach, this study utilizes the Generalized Method of Moments (GMM) estimator to address potential endogeneity, unobserved heterogeneity, and dynamic persistence in income inequality. The empirical findings indicate that financial inclusion, as measured by the Financial Inclusion Index, has a statistically significant negative effect on income inequality, suggesting that greater access to formal financial services contributes to a more equitable income distribution. Similarly, the Human Development Index is found to reduce income inequality, highlighting the importance of human capital development in mitigating income disparities. In contrast, foreign investment and domestic investment exhibit positive and significant effects on income inequality, implying that investment inflows may disproportionately benefit higher-income groups. Overall, the results underscore a high degree of inequality in Indonesia, consistent with the lagged coefficient reaching 0.97. Therefore, inclusive policy frameworks are required to ensure that investment-driven growth is more evenly distributed across provinces.