DIGITAL FINANCIAL INCLUSION AND POVERTY REDUCTION IN NIGERIA: THE MEDIATING ROLE OF MICROFINANCE DEVELOPMENT

Abstract

This study examines the impact of digital financial inclusion on poverty reduction in Nigeria, with particular

emphasis on the mediating role of microfinance institutions in enhancing inclusive financial outcomes. Using annual

time series data spanning 1990 to 2024, the study employs the Autoregressive Distributed Lag model as the baseline

estimation technique, while Fully Modified Ordinary Least Squares and Dynamic Ordinary Least Squares are

applied as robustness checks to validate the stability of the results. The findings indicate that digital financial

inclusion significantly contributes to poverty reduction in Nigeria. Key indicators like automated teller machine

penetration, mobile money services, mobile banking, and electronic banking exhibit positive and statistically

significant effects by improving access to financial services, reducing transaction costs, and expanding household

participation in the formal financial system. The results further show that microfinance institutions play a crucial

complementary role by deepening financial outreach at the grassroots level. Interaction effects reveal that

microfinance strengthens the effectiveness of digital financial inclusion instruments in reducing poverty. However,

macroeconomic instability, particularly inflation, exchange rate volatility, and high interest rates emerges as a major

constraint, significantly weakening the poverty-reducing effects of financial inclusion by eroding purchasing power

and limiting credit access. The study concludes that digital financial inclusion, when supported by strong

microfinance systems and macroeconomic stability, serves as a powerful mechanism for poverty reduction in

Nigeria. Consequently, the study recommends policies aimed at expanding digital financial infrastructure,

strengthening microfinance institutions, and ensuring macroeconomic stability as pathways toward sustainable

poverty alleviation and inclusive economic development.