'Financial Inclusion-Income Inequality' Nexus in Nigeria: Evidence from Dynamic Ordinary Least Square (DOLS) Modeling Approach

Abstract

High level of exclusion from the financial system could be a consequence of low level of financial development evident in such economy. Low financial access and access to financial services/products is a one of the contributory factors to the level of income generated by households and businesses and by extension the level of income inequality in such economy. To examine the “Financial Inclusion-Income Inequality” nexus in Nigeria, this paper specifies income inequality in Nigeria as a function of deposit money banks’ loans to SMEs, banks’ credit to the private sector, number of bank branches, and broad money supply-to-GDP ratio. The data used in this study are annual time series data from 1992 to 2018. Specifically, data on financial access (measured by having a number of commercial banks branches and broad money supply-to-GDP); and access to financial services and products (measured by deposit money banks’ loans to SMEs and deposit money banks’ credit to the private sector) were collected from the Central Bank of Nigeria (CBN) Statistical Bulletin. Data on level of inequality (measured by the Gini index) was collected from the National Bureau of Statistics (NBS). The unit root tests (i.e., ADF and PP) shows that the time series are non-stationary until after first differencing. To empirically analyze the impact of financial inclusion on inclusive growth, the Dynamic Ordinary Least Square (DOLS) econometric technique was employed. The results show that the coefficients of financial access variables are significantly different from zero. That is, the improvement in the financial access component of financial inclusion will prove to be more effective in reducing the income inequality gap in Nigeria. This may not be unrelated to the reality on ground as it affects the cost of credit and the stringent requirements often included as pre-condition for granting of loans and supply of credits by deposit money banks and other business financing institutions. This paper therefore recommends policy that increases awareness among citizens on the importance of owning and maintaining a bank account; and establishment of more branches in the rural areas to serve the high and growing rural population.