Abstract
Financial development is widely regarded as another conduit through which income inequality can be reduced. The study empirically examines the relationship between financial development and income inequality in selected Southern African Development Community (SADC) countries, employing the Generalised Method of Moments technique for the period 1980 to 2016. Based on the inequality-decreasing hypothesis, a model which links financial sector development and inequality was estimated. Empirical results revealed that financial sector development overall does have an impact on income inequality in the selected SADC countries. An interesting observation from the empirical results is that the actual dimension of financial development plays a significant role in determining the relationship between financial development and income inequality in the SADC region. The impact of financial depth on income inequality is not obvious in the study, depending on the variable used. On the relationship between financial system stability and income inequality, results reveal that a stable financial system is beneficial to the poor. Financial efficiency does not appear to have a significant role in reducing income inequality in the selected SADC countries. The findings imply that a specific approach to financial sector development rather than a blanket approach is desirable.
Highlights
Financial development has an integral role in the economy of a country (Clarke et al, 2003; Nasifeh and Khosrow, 2012; Levine et al, 2000; King and Levine, 1993; Easterly, 1993; Pagano, 1993; and Levine, 1997)
The paper sought to investigate the relationship between financial sector development and income inequality in Southern African Development Community (SADC) for the period 1980 until 2016
The findings revealed that the effect of the various measures of financial development on income inequality is not the same
Summary
Financial development has an integral role in the economy of a country (Clarke et al, 2003; Nasifeh and Khosrow, 2012; Levine et al, 2000; King and Levine, 1993; Easterly, 1993; Pagano, 1993; and Levine, 1997). Financial sector development has emerged as another source of reducing inequality as recognized in studies (Beck et al, 2007; Jalilian and Kirkpatrick, 2002; Honohan, 2004 and Demirgüç-Kunt and Levine, 2009), literature does not reach consensus. Through credit extension by allowing a large number of economic participants, including the poor, to gain access to micro finance institutions and financial market access. Demirgüç-Kunt and Levine (2009) contend that the nexus between the development of the financial sector and inequality is not so clear, as finance has the ability to exacerbate or reduce inequality. Becker and Tomes (1986) posit that inequality might be reduced in instances whereby financial services reach the disadvantaged and poor, thereby enabling them access to economic opportunities, which lessens intergenerational prevalence of comparative incomes.
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