The effects of financial inclusion on the welfare of smallholder farmers in Songwe region, Tanzania: Multidimensional analysis

Abstract

Financial inclusion has become a key component of the majority of poverty reduction and rural development policies in Sub-Saharan Africa, which are however subject to conflicting views and conditions in each context. This study explores the impact of financial inclusion, both on its own and as a composite index, on the welfare of the smallholder farmers in Songwe Region of Tanzania. The Sustainable Livelihoods Framework (SLF), the Technology Acceptance Model (TAM) and the Resource-Based Value Theory (RBVT) are the theories that underpin this study. The study used a cross-sectional survey type of research with a quantitative research approach based on the positivist paradigm. The smallholder farmers were sampled using multi-stage stratified random sampling and the questionnaires were administered to 386 farmers in four districts (Mbozi, Ileje, Momba and Songwe). The Composite Financial Inclusion Index (CFII) was derived using two-stage Principal Component Analysis (PCA) from four dimensions – access, usage, quality and digital financial services (DFS). Welfare effects were estimated using ordinary Least Squares regression with robust standard errors and using interaction-effects models. The results show a strong positive and significant relationship between the Usage dimension and the Welfare (β = 0.365, p = 0.001); Digital Financial Services has also a significant negative direct relationship with Welfare (β = –0.536, p < 0.001). There are practically no direct impacts of Access and Quality dimensions. The results of interaction analysis show that when combined with strong access, the negative digital effect is reversed (β = -1.057, p = 0.055); and the negative usage effect is strengthened when interacting with service quality (β = 0.639, p = 0.084). Education and income turn out to be the highest predictors of financial inclusion measures. The analysis shows that the impact of financial inclusion on welfare is not always positive and depends on the kind of financial inclusion. The policy recommendations are: 1) to encourage active rather than passive use; 2) to include financial and digital financial literacy programmes; 3) to build on consumer protection; and 4) to embed the digital financial services in the overall fabric of access. The results contribute to the understanding of the dynamics of financial inclusion in rural areas in Tanzania, and offer insights for policy interventions in specific contexts.