Aside from all the other factors, the connection between energy poverty and financial inclusion in developing countries has not been given enough attention. This study applies a theoretical framework to define the optimal associations, which means it captures the best relations between financial inclusion and energy poverty. This research analyzes the impact of financial inclusion on energy poverty in a panel of 66 developing countries from 2004 to 2022. The countries selected constitute a broad set of developing economies with differing degrees of financial inclusiveness, institutional quality, government expenditures, economic growth, and human capital, thus making them representative of the developing world. The study employs DCCE and MMQR estimation techniques to account for the varying effects that inclusion has on different quantiles. The main finding is that inclusion greatly lessens energy poverty, which is its most significant contribution to the services of energy in developing countries. The study empirically validates the Armey curve for selected countries, demonstrating a nonlinear relationship between government spending and energy poverty. This study adds to an enriched comprehension of this relationship and offers policy recommendations that enhance rural financial services with mobile banking and microfinance for clean energy investments and integrate financial literacy with energy initiatives. Strengthen governance and attract private investment through transparent regulations and public-private partnerships.
Keywords: Financial Inclusion, Institutional Performance, Energy Poverty, MMQR, DCCE.
JEL Codes: O16; Q40; Q56; G28; O17.
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Introduction
The question of energy poverty remains a combative issue in numerous regions worldwide. Unlike their counterparts in developed nations, those in developing countries cope with meeting the rising demand for energy. The notion of “energy poverty” has ignited debate amongst investigators. The Over 2 billion people rely on solid biomass, kerosene, or coal for cooking, lacking access to clean cooking facilities. Household air pollution from these sources contributes to approximately 3.7 million premature deaths annually. Progress in clean cooking access has been significantly slower than in electricity access (IEA, 2023). The United Nations Development Programme (UNDP) projects that energy poverty will remain a significant challenge, with over 670 million people expected to lack electricity access by 2030 (UNDP, 2023). Energy stands as a decisive driver of economic activity, assisting the contentment of basic human needs and the accomplishment of satisfactory living standards. Nevertheless, the extensive availability of affordable and environmentally friendly energy remains elusive, giving way to the issue known as energy poverty (EP) (Okere et al., 2023). In more precise terms, energy poverty involves the insufficiency of sufficient, affordable, dependable, top-notch, secure, and eco-friendly energy services to sustenance both economic progress and human well-being (Reddy et al., 2000: 44). Energy poverty denotes to the condition where individuals and businesses lack consistent access to essential energy products (World Economic Forum, 2010). It is linked with the execution of the Sustainable Development Goals (SDGs), particularly those intended at reducing poverty, eradicating hunger, enhancing health, encouraging gender equality, taking action on climate change and energy, and safeguarding biodiversity (Crentsil et al., 2019; Koomson & Danquah, 2021; Khan et al., 2023).
The association between energy usage and social advancement is convoluted, and tackling energy poverty (EP) holds worth for overall scientific and societal development. The International Energy Agency (IEA) summits that in developing nations, the lack of access to electricity or modern clean energy services often stems from financial and logistical challenges. Thus, these countries rely primarily on outdated solid bioenergy, lacking access to low-pollution and clean energy substitutes. The extensive use of highly polluting solid bioenergy adds to air pollution, unfavorably affecting public health, productivity, and educational outcomes (Mohan, 2021; Wang et al., 2023). It is observed that the electricity access rate has increased from 87% (2015) to 91% (2021) over the years. Still, 675 million people lacked access to electricity in 2021, mostly in LDCs (SDG report, 2023). The following figure shows the trend of energy poverty in different regions.
Figure 1: Trends of energy poverty in different regions (Source: (SDG report, 2023)
Financial inclusion plays a key role in addressing energy poverty by empowering access to formal financial amenities for low-income persons. Disparate financial development, which mainly satisfies to the affluent, financial inclusion emphases on democratizing financial services, predominantly for those in need. By confirming that the economically disadvantaged have access to loans, deposits, and credit, financial inclusion policies contribute to reducing energy poverty on a worldwide. Furthermore, financial inclusion is necessary for advancing efforts to alleviate energy poverty, as it permits marginalized communities to involve in sustainable initiatives through avenues like green loans and financial assistance (Koomson and Danquah, 2021; Khan et al., 2023).
Government expenditure stands as a fundamental pillar of fiscal policy, yet research into its impressions often yield mixed outcomes (Nguyen and Schinckus, 2020; Nguyen and Su, 2022). Scholarly address advocates a potential trade-off between the advantages and downsides of government spending (Dinh and Canh, 2019). Incremental spending by a lean government might foster economic growth concluded a crowding-in effect. Though, excessive public spending may lead to a crowding-out upshot detrimental to economic development (Kandil, 2017). Therefore, it may show nonlinear dynamics.
Our focus is increasingly drawn to developing countries due to their significant challenges with energy poverty. At the same time, these regions are experiencing a notable surge in financial inclusion. Over the past two decades, access to financial services has seen remarkable progress in developing countries. However, account ownership in these nations still falls short compared to high-income economies and the global average. This disparity highlights the need for more comprehensive research, as the current literature offers a limited perspective. To address this gap, further studies are essential to fully understand and enhance financial inclusion in developing countries, aiming to bridge the divide and foster sustainable economic growth.
The study formulated the following hypothesis to check the determinant energy poverty.
H1. Financial inclusion affects energy poverty.
H2. Government expenditure affects energy poverty.
H3. Institutional quality affects energy poverty.
H4. Human capital affects energy poverty.
H5. Economic growth affects energy poverty.
Energy poverty greatly intertwines with numerous socio-economic aspects illustrating the great intertwining of financial, institutional, and economic facets that comes with energy deprivation. Financial inclusion (H1) conveniently aids in solving the issue of energy poverty by extending credit, savings, and microfinance to the marginalized populace which allows them to modernize their energy solutions. Government expenditure (H2) also greatly affects energy poverty through public spending on energy infrastructure and other subsidies that aid in rural electrification and its accessibility, making it easier and cheaper for the public. Furthermore, the quality of institutions (H3) is an important factor where the existence of clear rules, good governance, and strong anti-corruption institutions makes it possible for the people to receive energy as well as helps in the realization of energy projects. Furthermore, human capital (H4), consisting of education and skill, enable individuals to better their social status and enables them to make rational decisions in terms of the energy they use and the technologies employed to use energy efficiently. To some extent, economic growth (H5) improves energy poverty by increasing people’s incomes and bringing in new investment into energy infrastructure, but this is only to the level which such policies are inclusive within the economy. All these emphasize the inclusiveness nature of financial, institutional, and economic in solving energy poverty, and aid in developing strategies to achieve sustainable development.
This research probes into the interconnection among financial inclusion (FINC) and energy poverty (EP), progressing standing studies in six momentous ways. Firstly, it is an exclusive inspection of the ramifications of financial inclusion and government spending on EP, a unique contribution to the literature. Secondly, the focus is concentrating towards developing countries, where the quick progress of financial inclusion contrasts sharply with persistent energy poverty despite plentiful natural resources. Given the considerable portion of the population lacking reliable electricity and clean cooking facilities, indulgent the link amongst FINC and EP is imperative for constructing effective policies. Additionally, developing nations are highly susceptible to the effects of climate change. Hence, it is essential to ascertain sustainable energy solutions that discourse both EP and environmental concerns. Thirdly, unlike conventional EP
