Samkele Leve and Forget M. Kapingura

DOI: https://doi.org/10.6000/1929-7092.2019.08.128

Published: 31 December 2019

Abstract: Financial development is widely regarded as another conduit through which income inequality can be reduced. The study empirically examines the relationship between financial development and income inequality in selected Southern African Development Community (SADC) countries, employing the Generalised Method of Moments technique for the period 1980 to 2016. Based on the inequality-decreasing hypothesis, a model which links financial sector development and inequality was estimated. Empirical results revealed that financial sector development overall does have an impact on income inequality in the selected SADC countries. An interesting observation from the empirical results is that the actual dimension of financial development plays a significant role in determining the relationship between financial development and income inequality in the SADC region. The impact of financial depth on income inequality is not obvious in the study, depending on the variable used. On the relationship between financial system stability and income inequality, results reveal that a stable financial system is beneficial to the poor. Financial efficiency does not appear to have a significant role in reducing income inequality in the selected SADC countries. The findings imply that a specific approach to financial sector development rather than a blanket approach is desirable.

Keywords: Financial sector development, income inequality, SADC, GMM.

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