Financial inclusion, income inequality, and institutions in sub-Saharan Africa: Identifying cross-country inequality regimes

This paper applies a finite mixture model to a sample of 28 sub-Saharan African countries to analyse the impact of financial inclusion on income inequality between 2004 and 2016. We hypothesise that the effect of financial inclusion on income inequality differs across groups of countries with similar but unobserved characteristics. We find that the impact of financial inclusion on income inequality varies across two distinct classes of countries. Furthermore, we prove that countries with high institutional quality are more likely to be in the class where financial inclusion reduces income inequality. The results pass a battery of robustness checks. These findings highlight the need for sub-Saharan African countries to develop better democratic environments and institutions if they expect to reap the benefits of financial inclusion.