Exploring the nexus between financial inclusion, livelihood diversification, and farm income in rural Nigeria

Abstract

Rural households in developing countries increasingly combine farm and non-farm livelihood activities to reduce income risk, improve resilience, and enhance household welfare. Access to financial services is an important driver of livelihood diversification because it improves investment capacity, facilitates risk management, and supports income-generating activities. This study examined the effects of financial inclusion and livelihood diversification on farm income among rural households in Osun State, Nigeria. Primary data were collected from 320 rural households selected through a multistage sampling procedure. An Endogenous Treatment Regression (ETR) model was employed to account for potential selection bias associated with households' participation in livelihood diversification. A Probit model was used to identify factors influencing participation in livelihood diversification, while the outcome equation estimated the effects of livelihood diversification and financial inclusion on farm income. The Probit estimates revealed that gender, education, farm size, land ownership, access to extension services, support from non-governmental organizations (NGOs), and financial inclusion significantly influenced participation in livelihood diversification. The outcome equation showed that age, gender, education, household size, land ownership, NGO support, and financial inclusion significantly affected farm income. The treatment effect estimates indicated that livelihood diversification had a positive and significant effect on farm income. The Average Treatment Effect (ATE) further confirmed that households engaged in diversified livelihood activities earned higher incomes than non-diversified households. The findings demonstrate that financial inclusion and livelihood diversification are complementary strategies for improving farm income and strengthening rural resilience. Enhanced access to financial services enables households to invest in productive activities, diversify income sources, and reinvest earnings into agriculture. Therefore, policies aimed at expanding financial inclusion, improving rural credit access, strengthening extension services, enhancing financial literacy, supporting NGO interventions, and promoting rural enterprise development can contribute significantly to sustainable livelihood improvement and poverty reduction among rural households.