Financial Intermediation and Poverty in Pakistan: An Empirical Analysis of the Mediating Role of Gross Fixed Capital Formation

Abstract

This research explores how gross fixed capital formation (GFCF) mediates poverty nexus between financial intermediation in case of Pakistan. Data were extracted from the Economic Survey of Pakistan, the World Bank and Pakistan Bureau of Statistics (PBS) for the years available preceded to this project, i.e., covering years 1996–2020. Poverty estimates were derived from an earlier study by the Cost of Basic Needs (CBN) method, which considers both food and non-food consumption based on the Household Integrated Economic Survey data. The empirical analysis uses the Autoregressive Distributed Lag (ARDL) model to estimate short-run and long-run relationships. The findings show that the effect of financial intermediation is a short-term reduction in poverty but in the long run it is positively associated with poverty. In addition, both the financial intermediation and the control of corruption index have a meaningful impact on strengthening GFCF. Transmission mechanism is evaluated with mediation analysis through Structural Equation Modeling (SEM). To link financial intermediation with poverty, they also explored whether financial intermediation to poverty runs through GFCF, the finding suggests that GFCF does not mediate. Financial intermediate action encourages capital accumulation, but its hoped-for trickle-down impact on poverty alleviation fails. They reflect some structural inefficiencies and economic leakages which hamper the smooth transmission of financial gains to unemployed and low-income groups. The study highlights the important roles that policy measures can play in enhancing institutional quality and ensuring that financial development and investment lead to poverty reduction that is inclusive and sustainable.

Keywords:

Financial intermediation, GFCF, Structural equation modeling, Poverty, ARDL, Institutional dynamics