FINANCIAL REFORMS AND CREDIT GROWTH NEXUS ON INCOME INEQUALITY IN SELECTED SUB-SAHARAN AFRICAN COUNTRIES
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- NGN 5000
ABSTRACT
Income inequality stalls economic growth with undesirable socio-economic consequences. Despite measures targeted towards reducing the inequality gap, disparities in income distribution persists. The link between financial reforms and income inequality is still relatively unexplored in the literature. This study appraises the impact of financial reforms including credit growth on income inequality using a sample of twenty selected countries in Sub-Saharan Africa (SSA) from 1980 to 2015. The broad objective is to assess the financial reforms and credit growth nexus on income inequality and establish if the reform-credit-inequality nexus exists. To achieve this, the analytical structure is designed to (1) observe the state of the financial system after the reform, (2) evaluate if credit growth is stimulated by financial reforms and (3) if credit growth has an equalising effect on income inequality. This analytical approach (general-to-specific) is conducted on the broad sample, the four sub-regions (Central, East, Southern and West Africa) and four representative countries (Cameroon, Kenya, Nigeria and South Africa). Five estimation techniques pooled ordinary least squares (OLS), fixed effects (FE), dynamic fixed effects (DFE), system generalised method of moments (sys-GMM) and error correction model (ECM)) are used in evaluating these interactive relationships. In line with the theoretical and empirical literature, the real interest rate, deposit rate, domestic credit to the private sector and the Gini index are the respective proxies for financial reforms, credit growth and income inequality. For the broad sample, findings reveal that financial reforms exhibit an indirect relationship with income inequality. For instance, from the FE results a percentage point change in the real interest rate is associated with 0.9% increase in credit growth, and a percentage change in credit growth is associated with 0.045% decrease in income inequality, on average, ceteris paribus. Similarly, results from DFE show that a percentage change in credit growth is associated with 0.062% decrease in income inequality, on the average. Results across the four regions vary. Credit growth reduces inequality significantly in Southern Africa by 0.207% while it aggravates inequality in East Africa by 0.036%. For Cameroon, Nigeria and South Africa, credit growth exhibits equalising impact on income while the reverse is the case in Kenya. Hence, contribution is made to the literature by providing evidence that the reform-credit-inequality nexus exists in addition to validating both the McKinnon-Shaw (1973) hypothesis that at a higher interest rate, financial intermediation improves. Results also validate the extensive margin theory of Greenwood and Jovanovich (1990) that as credit is extended and made available to those initially excluded income inequality reduces. Another contribution made to the scholarship methodology is empirically unbundling the effect of financial reforms on income inequality. Given these findings, one of the recommendations is that financial reforms policies that drive financial intermediation be pursued by stakeholders as these will indirectly lead to a reduction in income inequality. In other words, the ability to stimulate credit growth may be one of the avenues to reducing the income inequality gap in SSA and in developing economies in general.
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