The effect of financial development on income inequality in Africa

Figures & data

Table 1. World Bank financial sector development pillars and indicators.

Mainstays	Institutional Indicators
Depth	Private Sector Credit to GDP; M2 to GDP; Deposits to GDP; Gross value added of the financial sector to GDP; Financial Institutions’ asset to GDP.
Access	Accounts per thousand adults (commercial banks); Branches per 100,000 adults (commercial banks); % of people with a bank account; % of firms with a line of credit (all firms); % of firms with a line of credit (small firms).
Efficiency	Net interest margin; Lending-deposits spread; Non-interest income to total Income; Overhead costs (% of total assets); Profitability (return on assets, return on equity); Boone indicator (or Herfindahl or H-statistics)
Stability	Z-score; Capital adequacy ratios; Asset quality ratios; Liquidity ratios

Source: Cihak et al. (2013); World Bank (2019); Bolarinwa & Akinbobolo (2021).

Figure 1. Trends in financial development.

Figure 2. Trends of inequality among developed and developing countries.

Table 2. Data and sources.

Variables	Proxies	Measurement	Sources
Total Financial Development Indicator	TFD	This is an indicator of 4 financial development indicators of M2 to GDP; Z-Score; Account per 1000 people and the Boone Indicator.	Author calculation based on PCA correlation method. All indices are sourced from World Bank Development Database (WBDD).
Income Inequality	INQ	This is the GINI of household income.	Standardised World Income Inequality Database (SWIID).
Trade Openness	TOP	This is the ratio of the difference between Exports and Imports divided by GDP.	(WBDD)
Economic Growth	ECG	This is measured by per capita income in US$	WBDD
Government Expenditure	GOV	this is the ratio of government expenditure to GDP	WBDD
Lag of Income	LECG	This is the lag of economic growth.	WBDD
Inflation rate	INF	This is the change in the annual consumer price index.	WBDD
Institutional Quality	INST	This is captured by the level of corruption.	International Country Risk Guide (ICRG)
School Enrolment	SCH	This is captured by the ratio of secondary school enrolment to the total population.	WBDD

Table 3. Countries adopted in the study according to income grouping.

High Income Countries ($3,896–$12,055)	Lower Middle Income Countries ($996–$3,896)	Lower-income countries ($996 or Lower)
Seychelles, Equatorial Guinea, Botswana, Gabon, Mauritius, Namibia, and South Africa.	Angola, Cameroon, Cape Verde, Congo, Cote d’Ivoire, Ghana, Kenya, Lesotho, Mauritania, Nigeria, Sao Tome, and Principe, Swaziland, and Zambia.	Benin, Burkina Faso, Central African Republic, Chad, Democratic Republic of Congo, Eritrea, Ethiopia, Gambia, Liberia, Malawi, Mali, Mozambique, Niger, Rwanda, Senegal, Tanzania, Togo, Sierra Leone, Uganda and Zimbabwe.

Table 4. Descriptive statistics of the variables (High-Income Countries).

	INQ	GOV	ECG	INF	INST	SCH	TOP	PRIVATE	ACCOUNT	BOONE	ZSCORE
Mean	63.3937	105.8036	7978.194	5.3929	2.4927	75.7175	116.1073	45.0783	410.7776	−0.0644	14.6953
Median	65.4000	100.9969	7280.990	5.0056	2.5000	78.4058	103.2839	25.5538	201.3875	−0.0668	11.9997
Maximum	68.5000	444.7508	20333.94	36.9648	5.0000	121.6119	531.7374	160.125	2019.340	0.1028	95.2785
Minimum	41.9000	54.1799	1398.893	−2.4046	1.0000	21.9379	46.6673	2.1485	9.9591	−0.1862	2.6572
Std. Dev.	6.9305	47.5103	3814.855	4.6699	0.9918	19.0321	74.8301	44.4044	430.9488	0.0574	11.8102

Source: Researchers, 2019.

Table 5. Descriptive statistics of the variables (Middle-Low Income Countries).

	INQ	GOV	ECG	INF	INST	SCH	TOP	PRIVATE	ACCOUNT	BOONE	ZSCORE
Mean	49.24868	110.6712	1666.706	30.3692	2.1818	43.1898	91.0335	17.6260	364.8092	−0.1774	12.4734
Median	49.3000	106.4638	1272.883	7.1253	2.0000	41.9543	84.9107	14.4652	259.5560	−0.0889	10.4931
Maximum	60.3506	218.2561	3980.774	4145.108	4.0000	95.6679	178.9938	65.7418	1860.850	0.0152	42.8985
Minimum	31.8000	59.1330	459.1255	−9.6162	0.5000	10.8273	21.1244	2.0136	0.3689	−2.5407	−1.4584
Std. Dev.	7.1525	28.2255	927.3191	262.7516	0.7352	18.0293	34.3927	12.2319	402.7868	0.3022	7.2924

Table 6. Descriptive statistics of the variables (Low-Income Countries).

	INQ	GOV	ECG	INF	INST	SCH	TOP	PRIVATE	ACCOUNT	BOONE	ZSCORE
Mean	44.48923	115.3520	503.6199	87.06286	1.9606	26.0362	62.5905	13.1060	114.0026	−0.0471	9.0296
Median	44.2000	112.2614	452.9880	5.115901	2.0000	24.2685	56.2245	11.7002	99.2122	−0.0557	8.5951
Maximum	66.1013	211.9318	1347.972	24411.03	4.0000	58.5150	311.355	103.6320	492.5150	1.6074	20.0372
Minimum	29.5023	47.1638	122.8561	−8.974740	0.0000	5.2101	25.0419	0.4914	0.7157	−0.2770	−1.3082
Std. Dev.	5.78860	15.7794	226.3865	1295.263	0.7778	13.0359	32.5790	9.8627	83.9789	0.1208	4.4666

Source: Researchers, 2019.

Table 7. Result of the panel unit root test (Individual Effects and Trends).

Variables/Methods	LLC	Breitung	IPS	ADF-Fisher	PP-Fisher
INQ	−7.9901***	9.1377	−2.2666**	77.2194	93.5650**
ΔINQ	−19.9515***	−2.8675***	−5.7846***	136.600***	135.276***
INF	−14.1946***	−10.2977***	−10.2826***	368.708***	829.359***
ECG	−21.8616***	−14.7881***	−22.4847***	574.770***	835.168***
SCH	−3.85153***	9.35678	4.45209	56.7901	58.2738
ΔSCH	−350.676***	2.7E-12	−7.10831***	212.401***	230.102***
TOP	−3.40603***	−2.02710**	−1.93356**	120.091***	121.259***
INST	1.27823	0.23729	2.02666	31.2044	33.2329
ΔINST	−13.7339***	−7.83492***	−12.4253***	232.542***	254.150***
GOV	−6.45098***	−3.61376***	−4.45929***	157.502***	168.910***
Total Financial Development (PCA) Variables
ACCOUNT	−59.5886***	2.4980	−6.1984***	71.7933*	67.8610
ΔACCOUNT	−8.7504***	−3.6143***	−3.6143***	81.0128***	220.940***
BOONE	−0.2436	−0.4759	−1.0866	94.2729***	249.068***
ΔBOONE	−4.1211***	−5.6847***	−6.8477***	167.442***	452.714***
ZSCORE	−4.9026***	−0.3062	−2.6002***	130.076***	175.646***
ΔZSCORE	−11.7528***	−4.5194***	−7.5809***	221.938***	491.743***
PRIVATE	−1.4701*	3.4455	1.0884	73.7157	72.1810
ΔPRIVATE	−7.8115***	–	−8.9424***	236.789***	691.254***

***, ** and * denote 1%, 5% and 10% levels of significance respectively. Δ denotes first difference operator.

Source: Researchers, 2019.

Table 8. Correlation matrix.

	INQ	ECG	INF	INST	SCH	GOV	TOP	TFD
INQ	1
ECG	0.7814	1
INF	0.0544	0.1062	1
INST	0.3493	0.3027	−0.0006	1
SCH	0.6922	0.7524	−0.1244	0.3156	1
GOV	−0.4738	−0.5469	−0.0786	−0.0761	−0.2307	1
TOP	0.2124	0.3195	0.4231	0.0437	0.1993	0.0324	1
TFD	0.6459	0.6557	−0.0919	0.2091	0.6712	−0.1869	−0.1028	1

Source: Authors, 2019.

Table 9. Effect of financial development on inequality in Africa (All African Countries).

	(1)	(2)	(3)	(4)	(5)	(6)
Lag of Inequality	0.7858***	0.4453***	0.5738***	0.4552***	0.5516***	0.4940***
	(0.0993)	(0.1164)	(0.1196)	(0.0618)	(0.1156)	(0.0818)
Inflation	0.0689***	0.0935***	0.0792***	0.1201***	0.0818***	0.1001***
	(0.0178)	(0.0274)	(0.0247)	(0.0435)	(0.0235)	(0.0237)
Income	−1.4045*	−2.7535*	−2.1679**	2.1523	−1.9153**	−1.9940**
	(0.7236)	(1.6111)	(1.0007)	(3.5960)	(0.8970)	(0.9014)
School Enrolment	−0.0112	−0.0028	0.0081	−0.0368	0.0048	0.0044
	(0.0101)	(0.0138)	(0.0108)	(0.0275)	(0.0111)	(0.0106)
Institutional Qual.	0.1111	0.1952	0.1453	0.1004	0.1361	0.1657
	(0.1269)	(0.1250)	(0.1453)	(0.0218)	(0.1467)	(0.1552)
Government Exp.	−0.0478**	−0.0271	−0.0037	0.0005	−0.0051	−0.0094
	(0.0192)	(0.0169)	(0.0146)	(0.0218)	(0.0156)	(0.0145)
Trade Openness	−0.0690***	−0.0941***	−0.0703***	−0.0915***	−0.0728***	−0.0784***
	(0.0170)	(0.0183)	(0.0207)	(0.0184)	(0.0198)	(0.0190)
Lag of Income	2.4067**	6.7681***	5.6068***	0.6602	5.5519***	5.5510***
	(0.0134)	(1.7275)	(1.3503)	4.5173	(1.2943)	(1.2406)
Constant	10.1389**	6.6120	0.2283	10.1239	0.3252	3.9552
	(4.1490)	(5.3860)	(4.4977)	(10.7105)	(4.1606)	(5.2051)
Private Credit	0.0751***
	(0.0134)
Boone Indicator		2.0841
		(2.2035)
Z-Score			−0.0034
			(0.0078)
Account Ownership				0.0009
				(0.0036)
Total FD					0.0032	−0.1067
					(0.1472)	(0.2844)
Square of Total FD						0.0208
						(0.0553)
No of Countries	40	40	40	40	40	40
No of Instruments	17	17	17	17	17	18
Sargan Test (Prob.)	10.4839(0.1628)	9.2492(0.2353)	11.65512(0.1125)	−0.876(0.3813)	11.461(0.1197)	10.5681(0.1586)
AR 1 (Prob.)	0.1695(0.8654)	−0.0011(0.999)	−0.0057(0.9955)	−0.853(0.3936)	0.6878(0.9452)	−0.1098(0.9126)
AR 2 (Prob.)	−0.8160(0.4145)	−1.381(0.1673)	−1.5451(0.1223)	5.1878(0.6371)	−1.4144(0.1573)	−1.4855(0.1374)
F-stat (Prob.)	823.72(0.000)	455.20(0.000)	382.10(0.0000)	3886(0.0000)	433.97(0.0000)	731.86(0.0000)

***, ** and * stands for 1%, 5% and 10% significant levels respectively.

Notes: Model 1, 2, 3, 4. 5 and 6 represents Private Credit, Boone Indicator, Z-Score, Account Ownership Total Financial Development Indicator and Square of Total Financial Indicator respectively’.

Table 10. Effect of financial development on inequality in Africa (Low-Income Countries).

	(1)	(2)	(3)	(4)	(5)	(6)
Lag of Inequality	0.8156***	0.5981***	0.6084***	0.5801***	0.3826*	0.6082***
	(0.1371)	(0.1193)	(0.1289)	(0.1326)	(0.2143)	(0.1361)
Inflation	0.0611*	0.0748**	0.0688**	0.0729	0.1067***	0.0406
	(0.0362)	(0.0381)	(0.0272)	(0.0551)	(0.0169)	(0.0282)
Income	2.5276*	4.5049***	3.7529***	5.1028***	5.1709***	4.1319***
	(1.3268)	(0.8988)	(0.8956)	(0.6801)	(1.1394)	(1.0586)
School Enrolment	−0.05164**	−0.0533*	−0.0547***	−0.0474**	−0.0809**	−0.0731***
	(0.0207)	(0.0275)	(0.0177)	(0.0202)	(0.0347)	(0.0281)
Institutional Qual.	−0.6152	−0.2649	−0.0245	−1.4864*	0.8410	0.8829
	(0.7299)	(0.8228)	(0.4634)	(0.8154)	(1.5845)	(0.8648)
Government Exp.	−0.0240	−0.0530***	−0.0269	−0.0540	−0.0003	−0.0334
	(0.0298)	(0.0158)	(0.0213)	(0.0614)	(0.0219)	(0.0233)
Trade Openness	−0.1049***	−0.0846***	−0.0913***	−0.0562	−0.1154***	−0.0861***
	(0.0255)	(0.0236)	(0.0228)	(0.0380)	(0.0219)	(0.0233)
Private Credit	0.1295***
	(0.0459)	−7.6859
Boone Indicator		(9.2523)
			0.1269
Z-Score			(0.0964)
				−0.0190***
Account Ownership				(0.0068)
Total FD					−0.4875	4.6749
					(1.0723)	(2.8535)
Square of Total FD						4.5387**
						(2.1876)
No of Countries	20	20	20	20	20	20
No of Instruments	13	13	13	15	15	14
Sargan Test (Prob.)	8.4451(0.1334)	6.6311(0.1753)	6.8043(0.2356)	2.0576(0.9566)	6.3213(0.5028)	8.2616(0.1424)
AR 1 (Prob.)	0.99245(0.3210)	−0.2598(0.795)	−0.9128(0.3613)	−1.133(0.2571)	−0.7742(0.4388)	−0.1168(0.9070)
AR 2 (Prob.)	−1.0059(0.3145)	−1.069(0.2851)	−1.2541(0.2098)	−1.179(0.2385)	−1.9197(0.3577)	−1.066(0.2864)
F-stat (Prob.)	47322.22(0.000)	580417(0.000)	1.29e + 06(0.0000)	166150(0.0000)	970064(0.0000)	532652(0.0000)

Table 11. Effect of financial development on inequality in Africa (High & Middle-Low Income Countries).

	(1)	(2)	(3)	(4)	(5)	(6)
Lag of Inequality	1.1473***	1.1328***	1.2197***	0.9900***	0.9592***	1.2103***
	(0.2576)	(0.2250)	(0.2903)	(0.2701)	(0.2352)	(0.3741)
Inflation	0.0327**	0.0314	0.0452**	0.0328**	0.0540**	0.0488
	(0.0253)	(0.1960)	(0.0215)	(0.0293)	(0.0254)	(0.0463)
Income	−2.0431**	−2.0042**	−2.4675**	−1.0231**	−0.9362**	−2.5513**
	(1.4790)	(1.3867)	(1.7492)	(2.1099)	(1.4316)	(2.4293)
School Enrolment	0.0255	0.0507***	0.0433***	0.0283	0.0477***	0.0570*
	(0.0176)	(0.0117)	(0.1134)	(0.0284)	(0.0143)	(0.0298)
Institutional Qual.	−0.0345	−0.0293	−0.0424	−0.0534	−0.6757	−0.4851
	(0.0235)	(0.0219)	(0.0318)	(000423)	(0.9629)	(0.2548)
Government Exp.	0.0491***	0.0609***	0.0606***	0.0483**	0.0570***	0.0730***
	(0.0051)	(0.1299)	(0.0093)	(0.0224)	(0.0047)	(0.0275)
Trade Openness	−0.0122	−0.0186	−0.0245	−0.0064	−0.0242	−0.0316
	(0.0154)	(0.0170)	(0.0193)	(0.0150)	(0.0185)	(0.0299)
Private Credit	0.0308***
	(0.0118)
Boone Indicator		0.0847
		(0.4800)
Z-Score			−0.0168*
			(0.0095)
Account Ownership				−0.0002
				(0.0018)
Total FD					−0.3753*	−1.0676
					(0.1988)	(1.4810)
Square of Total FD						0.1088
						(0.1860)
No of Countries	20	20	20	20	20	20
No of Instruments	12	12	12	12	12	13
Sargan Test (Prob.)	4.2741(0.4101)	4.1717(0.47249)	4.7921(0.4771)	4.8445(0.4445)	3.5308(0.6320)	3.0623(0.65474)
AR 1 (Prob.)	1.1726(0.2410)	1.7928(0.0730)	1.4360(0.1510)	0.8199(04122)	1.259(0.2080)	3.5089(0.0005)
AR 2 (Prob.)	0.4846(0.6280)	−1.063(0.2880)	−1.0163(0.3095)	−1.3864(0.1656)	−1.2443(0.2134)	−0.8239(0.4100)
F-stat (Prob.)	10200(0.0000)	3157.78(0.000)	7393.43(0.0000)	4546.07(0.0000)	12117(0.0000)	6215.11(0.0000)

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