Over two decades sub-Saharan Africa has grown an average by 4.8% per annum. A trend called “Africa rising in the literature” but this robust economic growth seem to have benefited only a minority of elite individuals as poverty in the region remains high and income inequality continues to rise. Critics attribute this to a lack of financial inclusion. This study analyses the relationship between various aspects of financial inclusion and income inequality in sub-Saharan African using the Findex 2011 dataset with the intention to determine which aspects of financial inclusion have the greatest effect on income inequality.
Our results show that formal account use for business, electronic payments and formal savings have a positive relationship with income inequality. This possibly reflects the low level of financial inclusion in the region. Furthermore, the positive relationship may suggest that owning a formal account does not necessarily lead to improvement in access to credit. That is, most of the account owners are likely first time users and problems such as moral hazard and information asymmetries, which are associated with a lack of financial infrastructure in the region still holds. This is likely to encourage banks to hold excess liquidity and thus grant fewer loans. The study accordingly recommends efforts to increase financial inclusion as well as reduce excess liquidity in the banking system through the development of financial infrastructure in order to encourage banks to support economic activities through lending.
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