The Effect of Financial Development with Emphasis on Banking Sector on Poverty Reduction (Case Study of Developing Countries)

Due to important of poverty reduction in developing countries, this article examines the effect of financial development on poverty reduction using unbalanced panel data for 29 developing countries with upper middle income between the years 1990 to 2011. For this purpose, the weighted average was calculated of three indicators of financial development that include Ratio of Liquid Liabilities to Gross domestic product, Private Credit by Deposit Money Banks to Gross domestic product and the Ratio of Deposit money Bank Assets to Gross domestic product, the multilateral index of financial development using PCA with SAS software, and the four indicators of financial development on poverty reduction was estimated separately using Eviews software. Stata software was used to select the appropriate model. The results show that all four indicators of financial development have significant and positive effects on poverty reduction in developing countries have been selected. In addition, foreign direct investment and income also showed positive effects. However, the negative effect of openness on reducing poverty appeared in model.