This study employs a two-stage least squares (2SLS) instrumental variable (IV) approach to examine the role of financial inclusion in improving employment conditions, household living standards, and sanitation in Bangladesh. By leveraging variations in financial inclusion across sixty-four districts and seven divisions in Bangladesh, this research aims to establish a causal relationship between financial inclusion and household welfare. The analysis utilizes data from IPUMS International 2011 and IPUMS DHS 2014 for Bangladesh. To address potential endogeneity, the study employs instrumental variable (IV) techniques, using (i) the ratio of the Hindu religious population in each district and division and (ii) exogenous growth in financial inclusion as instruments. The findings reveal that financial inclusion enables households to invest in better living conditions, while also improving access to safe drinking water and sanitation facilities. The mechanism behind these positive effects is driven by increased labor force participation and higher employment rates. Moreover, financial inclusion significantly improves employment conditions, potentially facilitating a shift away from low-value-added agricultural work as households gain access to financial services. This study is unique in its examination of within-country variations in financial inclusion and its application of instrumental variable techniques to address endogeneity. Utilizing microdata from Bangladesh, it provides robust evidence on the impact of financial inclusion on household welfare.
