The relationship between financial inclusion and income inequality in sub-Saharan Africa: Evidence from disaggregated data

Abstract

Over two decades sub-Saharan Africa has grown by an average of 4.8 percent per annum, a trend called “Africa rising in the literature” but this robust economic growth has benefited only a minority of elite individuals as poverty in the region remains high and income inequality continues to rise. This study analyses the relationship between various aspects of financial inclusion and income inequality in sub-Saharan African using the World Bank Global Findex 2011 with the intention to determine which aspects of financial inclusion have the greatest effect on income inequality. Our results show that account use for business, electronic payments and formal savings have a positive relationship with income inequality. This possibly reflects colonial institutional design as Obeng-Odoom (2016) indicated that colonial administration left behind uneven development structure which in some cases are re-enforced by current urban governance practices and processes. These colonial institutions significantly define financial sector development and shape the distribution of economic opportunities. Thus, we argue that though account ownership has improved, it does not necessarily imply an increase in credit accessibility. This is because of problems of information asymmetry associated with lack of financial infrastructure in the region that encourages banks to hold excess liquidity and thus grant fewer loans. The study accordingly recommends genuine efforts to engage in democratic governance to improve the quality and functioning of institutions to support financial sector development. Furthermore, a holistic approach to development that involves both top-down and bottom-up is recommended to encourage participation by all the sectors of the economy.

Keywords: Financial inclusion; Financial institutions; Financial services; Welfare and poverty