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

International Journal of Research and Scientific Innovation (IJRSI) | Volume IX, Issue II, February 2022 | ISSN 2321–2705

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

Okowa, Ezaal, Vincent, Moses Owede
University of Port Harcourt, Nigeria.

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.

Keywords: Inclusion, Financial Access, Access to Financial Services/Products, Gini Index, Inequality

Introduction

Inequality in income distribution and unequal financial stability have been long-standing issues in developing countries, with African countries in particular suffering from these issues (Levine, 2008; Maasoumi, Heshmati, Wan, Batuo, & Asongu, 2015; Neaime, 2015; Neaime & Gaysset, 2017). An increasing number of studies have emphasized the adoption of “financial inclusion” as a means of increasing access to financial services for a larger segment of the population (Maune, Matanda, & Mundonde, 2020; Omar & Inaba, 2020; Sha’ban, Girardone, & Sarkisyan, 2020) in order to address these issues. Financial inclusion refers to all of the efforts made to bring poor people into the financial system so that they can take advantage of financial services. Currently, financial inclusion is regarded as a policy tool for the achievement of a wide range of macroeconomic objectives. Money movement, investment, and increased savings are all made possible through financial inclusion. Financial systems are also more stable when people have access to financial inclusion services. It also contributes to economic development and long-term development (Beck, Demirgüç-Kunt, & Levine, 2007; Cumming, Johan, & Zhang, 2014; Klapper, El-Zoghbi, & Hess, 2016; Levine, 2005; Morgan & Pontines, 2014; Park & Mercado, 2015, 2018). Nonetheless, financial inclusion has a variety of positive implications for economic development, but it may be hampered by a lack of financial literacy, which prevents people from taking advantage of financial services at their full potential and dilutes the impact of such inclusion (Ardic, Heimann, Mylenko, 2011; Chikalipah, 2017; Nyarko, 2018). Because it has a negative impact on economic outcomes in the form of poverty and inequality, low financial literacy is critical in financial decision-making and must be addressed (Refera, Dhaliwal, & Kaur, 2016). The African Development Bank published a report in 2013 stating that African countries had not performed well in terms of financial and economic reforms aimed at eradicating poverty and inequality. These findings are supported by Tchamyou, Erreygers, and Cassimon (2019) and Tchamyou (2020), who state that a large segment of the African population has yet to be financially included in the economy. According to a report published by the World Bank in 2016, African countries account for more than half of the world’s poor. According to the World Bank’s report (Africa Development Bank, 2012), Africa is also the second-most unequal region in terms of income distribution after Latin America in terms of per capita income. The implications of this are that financial inclusion may be one of the factors that contribute to the African population’s ability to lift themselves out of poverty and inequality. Also, of concern to policymakers in developing countries generally, and Africa specifically, is the stability of the financial system. Following policies of financial inclusion and financial stability, on the other hand, does not lead to the same result. In contrast to financial stability, which aims to improve asset quality by adhering to stringent regulations while providing financial services, the goal of financial inclusion is to broaden and enable financial access to a larger segment of the population, allowing financial institutions to make some concessions in terms of regulatory requirements. It would be interesting to conduct research in order to better understand how financial inclusion and financial stability interact in African countries.

Read More