Financial sector development and income inequality in South Africa

The purpose of this paper is to examine the relationship between financial sector development and inequality in South Africa for the period from 1990 to 2012. Unlike previous studies, the study examines the role of both the broad measure of financial sector development (Bank credit to the private sector) and a measure of financial inclusion (ATMs).

Utilising quarterly data, the autoregressive distributed lag bounds testing model approach to cointegration test was estimated. The approach was preferred due to its compatibility with data of different orders and flexibility.

The findings indicate that financial development, especially when it is inclusive reduces the level of inequality in South Africa both in the short- and long-run. The results also highlighted that economic growth, external trade activities and government activities have played a very important role in reducing inequality in South Africa. On the other hand the empirical results also highlight that increasing inflation is regressive on inequality in South Africa.

The results from the study imply that financial development on its own though important may not benefit the disadvantaged groups such as the poor and the rural community until it is inclusive. It is important to note that the study was carried out on the premise that inequality plays a very important role in exacerbating poverty levels in South Africa.

The paper highlights another avenue which authorities can pursue to reduce the level of inequality in the country.

The paper documents the importance of financial inclusion in reducing the level of inequality in South Africa rather than advocating for financial sector development only.

The paper makes a contribution through analysing the effect of financial inclusion on income inequality rather than broad financial sector development which is common to the majority of the available empirical studies.