Threshold effects of financial access on income inequality in Africa: empirics and policy implications

Reducing income inequality on the back of improved financial access is one of the major preoccupations of countries in Africa. This is based on the premise that higher financial access provides crucial financial services to the poor. However, empirical evidence on financial access-income inequality link is inconclusive given the varying findings. Increasingly, this lack of conclusiveness may be linked to indirect factors that are hitherto ignored in the existing literature. With high income inequality, sluggish economic growth and high interest rates, re-engaging the impact of financial access on income inequality in the light of the relative changes in interest rates and that of economic growth deserve far more nuanced and in-depth analysis. This study therefore contributes to the ongoing literature by examining the impact of financial access on inequality in Africa when the effect is conditioned on the relative speed of growth (𠑔) and that of real interest rates (𠑟). By using a sample splitting approach that relies on a computationally robust bootstrap algorithm, we find that financial access does not reduce income inequality. While financial deepening exacerbates inequality in Africa, the inequality-widening effect is exceedingly higher when the gap between countries’ 𠑟 and 𠑔 sufficiently exceeds the estimated threshold. This finding is robust to the measures of income inequality. In addition to reducing interest rates, policies that aim to spur economic growth are critical in facilitating the income inequality-reducing effect of financial access in Africa.