Financial Development, Income Inequality and Poverty Alleviation: Some Empirical Evidence

Abstract

This study examines the relationship between financial development, income inequality and poverty reduction in a sample of 48 Sub-Saharan African (SSA) countries, observed during the 1980-2017 period. The results indicate that financial development, when proxied by private sector credit and liquid liabilities, reduces poverty. The results are mixed for the Claims on domestic real nonfinancial sector by the Central Bank. On the other hand, the results of the direct and cross-estimates showed a positive and significant effect of income inequality on poverty. We conclude that income inequality is such large that a larger proportion of the population is impoverished and the poverty gap is widening further. Moreover, income inequality seems to slow down the positive effects of financial development on poverty reduction. The findings allow us to recommend that monetary and public authorities in SSA countries support the development of the financial sector, particularly banks, encourage financial institutions to channel financial resources to the poor but with income-generating initiatives and enforce laws to control income inequality.