Analysis of the Impact of Financial Sector Development on Income Inequality: Evidence from Nigeria, 1980-2012

Abstract

There is a consensus within economic literature that financial sector development has a positive impact on economic growth. However, its effect on income inequality is controversial among economists. The objective of this study is to examine whether financial development has an impact on inequality in Nigeria using data from 1980-2012. Financial development is measured in its comprehensive dimensions as financial depth, financial efficiency, financial stability and financial liberalization in the study, while both gross and net Gini coefficients are employed to measure income distribution. ARDL is used for empirical estimation. Except for financial liberalization, financial development has a positive impact on inequality in the longer term. The conclusion of the study is that financial development has a U-shaped impact on income inequality, indicating that financial development would worsen inequality before improving it after a certain tipping point has been attained. It is recommended that policies and reforms that would facilitate financial depth, stability and efficiency would lead to an improvement in income distribution in Nigeria, albeit in the long run. Similarly, policymakers should consider overhauling the financial system through innovations, adequate and effective regulation, ensuring sound and efficient legal system, efficient mobilization of funds and making such funds available for productive investments in remote areas.