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Revisiting Financial Development and Income Inequality Nexus for Africa

Author

Listed:
  • Mustapha Jobarteh
  • Huseyin Kaya

    (Istanbul Medeniyet University)

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.

Suggested Citation

  • Mustapha Jobarteh & Huseyin Kaya, 2019. "Revisiting Financial Development and Income Inequality Nexus for Africa," The African Finance Journal, Africagrowth Institute, vol. 21(1), pages 1-22.
    • Handle: RePEc:afj:journl:v:21:y:2019:i:1:p:1-22
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    Citations

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    Cited by:

    1. Bolarinwa, Segun Thompson & Akinlo, Anthony Enisan, 2021. "Is there a nonlinear relationship between financial development and income inequality in Africa? Evidence from dynamic panel threshold," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    2. Sifundo Ntokozo Dlamini & Lindokuhle Talent Zungu & Nomusa Yolanda Nkomo, 2023. "The Optimal Level of Financial Growth in View of a Nonlinear Macroprudential Policy Regime Model: A Bayesian Approach," JRFM, MDPI, vol. 16(4), pages 1-21, April.
    3. Biruk B. Ashenafi & Dong Yan, 2023. "Financial intermediation, inclusion, Fintech, and income inequality in Africa: Robust evidence from the supply and demand side data," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(2), July.
    4. Lindokuhle Talent Zungu, 2022. "Nonlinear Dynamics of the Financial–Growth Nexus in African Emerging Economies: The Case of a Macroprudential Policy Regime," Economies, MDPI, vol. 10(4), pages 1-18, April.

    More about this item

    Keywords

    Financial development; income inequality; Africa; system GMM;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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