Financial inclusion and income inequality nexus: A case of Africa

Reducing income inequality to ensure everyone enjoys the dividend of economic growth is among the United Nation’s priorities for achieving Sustainable Development Goals. Recently, using an inclusive financial system as an instrument to promote inclusive growth has become a global policy priority. However, little is known about the distributional impact of multidimensional financial inclusion. Thus, we analyse the effect of multidimensional financial inclusion on income inequality using panel data for 23 African countries from 2004 to 2018. Employing an endogenous panel threshold model, we demonstrate that only a higher degree of financial inclusion has a favourable distributional effect. Using panel quantile regression, we find that pronounced, favourable distributional impacts of financial inclusion are observed in the higher inequality quantiles. We further demonstrate that the favourable distributional impact of financial inclusion is pronounced in the presence of a higher institutional quality. Our results are robust to several sensitivity analyses, such as instrumental variables, Bayesian model averaging, sub-sampling, and alternative measurement of income inequality. Our results highlight that promoting an inclusive financial system is essential for reducing income inequality, thereby achieving inclusive economic growth. The results also imply that promoting institutional quality is essential for people to enjoy the pronounced distributional impacts of financial inclusion.