Financial Development and Income Inequality Across Different Income Brackets in Africa

Abstract

The income inequality gap has persisted and worsened in African nations, posing significant socio-economic challenges to the continent. Financial development has been proposed as a potential mechanism for reducing income inequality. However, various studies have produced inconsistent results regarding the finance-income inequality nexus. Against this background, this paper employs a two-step system GMM on a panel of 20 African countries for the period 2004–2017 to investigate this nexus. The analysis was conducted on the overall sample and across different income categories of African nations. The study reveals that the relationship between various aspects of financial development and income inequality differs between market (pre-transfer) and net (post-transfer) inequality measures, and across different income groups in African countries. The study highlights that policymakers in African countries need to prioritize comprehensive financial sector development strategies that go beyond merely increasing access to financial services. Policies should aim to enhance financial depth while simultaneously improving efficiency and stability, with a particular focus on the transition from low to middle-income status.