Financial Development and Income Inequality in Nigeria: An Empirical Investigation

Abstract

This study investigates the impact of financial development on income inequality in Nigeria using secondary data from the World Development Indicators database and the Standardized World Income Inequality Database (SWIIDspanning from 1990- 2021. The methodology employed includes the ADF test for unit root, the Johansen Test for Co-integration, the Ordinary Least Square(OLS) Technique, and diagnostic tests like the normality test, Stability test, Granger causality test.The explanatory variables were financial deepening (FID), credit to the private sector (CPS), bank capital to asset ratio (BCAR), population growth (POP), and trade openness (TOP) while the dependent variable is the Gini coefficient (GINI) proxy for financial development. The unit root test result shows that the variables are in the same order of stationarity, they were all stationary at first difference. The Johansen Test for Co-integration shows that there is a long-run relationship between the variables in the model. The OLS results of the analysis show that financial deepening (FID) and bank capital to asset ratio (BCAR) have a negative relationship with income inequality in Nigeria with financial deepening having a significant relationship with income inequality; and bank capital to asset ratio have an insignificant relationship with inequality. The results also show that Credit to the private sector (CPS), population growth (POP), and trade openness (TOP) maintain a positive and insignificant relationship with income inequality in Nigeria. Based on the findings,the study recommends that policymakers should focus on several key strategies, capable of promoting financial deepening through initiatives like expanding banking services to underserved areas.