The impact of multidimensional financial inclusion on welfare outcomes

Abstract

This study investigates the factors influencing financial inclusion among smallholder farmers in Makhanda, South Africa, and assesses its impact on household welfare. To provide a more comprehensive understanding than traditional single-indicator measures, the study employs a Multidimensional Financial Inclusion Index (MFII) constructed across five key domains including access, usage, quality, financial literacy, and resilience. Data were gathered from 100 smallholder farmers through a structured questionnaire using a simple random sampling. Analytical methods included Poisson and Probit models to identify determinants of financial inclusion, and Propensity Score Matching (PSM) to evaluate its effects on welfare. Findings reveal that overall financial inclusion among these farmers remains low due to challenges such as limited access to credit, inadequate financial literacy, dependency on informal financial systems, and insufficient institutional support. Key factors positively influencing financial inclusion include extension services, education, access to markets, farming experience, and participation in farmer groups. The PSM analysis indicated that financial included farmers tend to experience better welfare outcomes, such as higher dietary diversity, increased ownership of livestock and assets, and improved food security compared financially excluded farmers. The study suggests enhancing extension services with tailored financial awareness programs, expanding access to microcredit and microinsurance tailored for smallholder farmers, and introducing targeted financial literacy initiatives. These strategies could enhance resilience, encourage investments in productive activities, and contribute to improved welfare for smallholder farmers in the Eastern Cape region.