Revisiting financial development and income inequality nexus for Africa

Abstract

We asked how financial development has affected income inequality in Africa based on data from 23 African countries from 1990 to 2014 utilizing panel data approaches. Unlike the extant literature that relies on single measures of financial development, we instead rely on a comprehensive composite index of financial development, financial institutions development and financial markets development - which collectively benchmark countries' financial deepening, access and efficiency on a scale of 0 to 1. In line with theoretical models that postulate an inequality-widening effect of financial development, we find that financial development linearly exacerbates income inequality, which is economically and statistically significant. Our results are robust to different measures of financial development, income inequality and possible endogeneity problems in finance-inequality nexus. Therefore, African countries need to promote not just financial deepening policies that enable reliable access to finance, but also ensure that low income households have access to finance at acceptable costs. Such financial inclusion policies are necessary for reducing income inequality within the continent. © 2019, African Finance Association.