Financial Development and Income Inequality in Nigeria: Testing the Financial Kuznets Curve Hypothesis

Authors

  • Yusuf Shamsuddeen Nadabo Department of Economics, Umaru Musa Yar'Adua University, Katsina State, Nigeria
  • Tiri Gyang Dakyong Department of Agricultural Economics, Federal University Dutsin-Ma, Katsina State, Nigeria
  • Hannatu Ismail Department of Economics and Development Studies, Federal University Dutsin-Ma, Katsina State, Nigeria

DOI:

https://doi.org/10.33003/fujafr-2024.v2i1.75.92-105

Keywords:

Financial Kuznets Curve, Inequality, Structural Breaks, Causality, Nigeria

Abstract

This study aims to investigate the link between financial development and income inequality in Nigeria, considering the potential existence of a financial Kuznets curve in Nigeria from 1986 to 2022. The study uses datasets from the World Bank and International Monetary Fund Database. It employs the Augmented Dickey-Fuller (ADF), Phillips-Perron (PP), Zivot-Andrews (ZA), ARDL bounds testing approach, and the Toda-Yamamoto causality test to determine the direction of causality between the two variables. The study finds evidence of an inverted U-shaped relationship between financial development and income inequality, potentially supporting the Financial Kuznets curve hypothesis in Nigeria. Additionally, the results of the Toda-Yamamoto causality test show a unidirectional causality running from financial development to income inequality. The findings have significant implications for economic development and social stability in Nigeria, emphasizing the need for targeted policies to mitigate the potential adverse effects of financial development on income inequality. This study fills a gap in existing research by examining the financial Kuznets curve in Nigeria and accounting for structural breaks, thus contributing valuable insights to the ongoing debate on finance and inequality.

References

Adegbite, E., & Nakpodia, F. (2018). Financial inclusion and financial development in Nigeria. In Financial Inclusion in Africa (pp. 1-20). Palgrave Macmillan, Cham.

Adeleye, N., Osahon, G., & Osarobo, A. (2021). Financial development and income inequality in Nigeria: An autoregressive distributed lag (ARDL) approach. CBN Journal of Applied Statistics, 12(1), 1-26.

Altıner, A., & Yılmaz, B. (2022). The relationship between income inequality and economic growth in top, middle, and low performing countries. Journal of Economics, Finance and Accounting, 9(1), 27-38.

Anyanwu, J. C., Erhijakpor, A. E. O., & Obi, E. (2021). Income inequality and economic growth in Nigeria. African Development Review, 33(1), 1-14.

Arcand, J. L., Berkes, E., & Panizza, U. (2015). Too much finance? Journal of Economic Growth, 20(2), 105-148. DOI: https://doi.org/10.1007/s10887-015-9115-2

Ayagi, S. R., & Salisu, M. (2023). Financial Reporting Quality and Information Asymmetry: A Review of Empirical Literature. FUDMA Journal of Accounting and Finance Research [FUJAFR], 1(3), 19-29. DOI: https://doi.org/10.33003/fujafr-2023.v1i3.51.19-29

Baiardi, S., & Morana, C. (2016). Institutional determinants of financial development in the MENA region: Evidence from panel data. Economic Modelling, 57, 197-213.

Baiardi, S., & Morana, C. (2018). Financial development and income inequality: time series evidence. Journal of Development Economics, 133, 153-168.

Baland, J. M., & Robinson, J. A. (2000). Is child labor inefficient? Journal of Political Economy, 108(4), 663-679. DOI: https://doi.org/10.1086/316097

Becker, G. S., & Tomes, N. (1979). An equilibrium theory of the distribution of income and intergenerational mobility. Journal of Political Economy, 87(6), 1153-1189. DOI: https://doi.org/10.1086/260831

Becker, G. S., & Tomes, N. (1986). Human capital and the rise and fall of families. Journal of Labor Economics, 4(3), S1-S39. DOI: https://doi.org/10.1086/298118

Beck, T. (2014). Finance, growth, and inequality: The challenge of financial development. Journal of Economic Literature, 52(3), 693-728.

Bektur, T. (2023). Financial development and income inequality: Evidence from emerging economies. Economic Systems, 47(1), 1-15.

Carré, E., & L’oeillet, G. (2018). Finance and income inequality: A review and new evidence. Journal of Economic Surveys, 32(4), 1076-1105.

Can, M., & Yılmaz, B. (2022). The validity of the financial Kuznets curve in the Turkish economy. Journal of Economics, Finance and Accounting, 9(1), 1-14.

Can, M., Gozgor, G., & Tiwari, A. K. (2022). The environmental Kuznets curve in the presence of renewable energy and trade openness: The case of the United States. Energy Economics, 105, 1-10.

Chletsos, M., & Sintos, A. (2023). Financial development and income inequality: A meta‐analysis. Journal of Economic Surveys, 37(4), 1090-1119. DOI: https://doi.org/10.1111/joes.12528

Çisem Bektur, M. (2023). The impact of financial development and taxes on income distribution in the Turkish economy. Journal of Economics, Finance and Accounting, 10(1), 1-14.

Christensen, I., Meh, C. A., & Moran, K. (2016). Bank leverage and monetary policies risk-taking channel: Evidence from the United States. Journal of Money, Credit and Banking, 48(5), 853-897.

Dinda, S. (2004). Environmental Kuznets curve hypothesis: A survey. Ecological Economics, 49(4), 431-455. DOI: https://doi.org/10.1016/j.ecolecon.2004.02.011

Doytch, N., & Narayan, S. (2023). Financial development and energy consumption: Evidence from the financial Kuznets curve hypothesis. Energy Economics, 100, 1-14.

Deidda, L., & Fattouh, B. (2002). Non-linearity between finance and growth. Economics Letters, 74(3), 339-345. DOI: https://doi.org/10.1016/S0165-1765(01)00571-7

Demirgüç-Kunt, A., & Levine, R. (2009). Finance and inequality: Theory and evidence. Annual Review of Financial Economics, 1(1), 287-318. DOI: https://doi.org/10.1146/annurev.financial.050808.114334

Greenwood, J., & Jovanovic, B. (1990). Financial development, growth, and the distribution of income. Journal of Political Economy, 98(5), 1076-1107. DOI: https://doi.org/10.1086/261720

Ibrahim, M. H., Alagidede, P., & Al-Mulali, U. (2022). Financial development and income inequality in Jordan: Evidence from the financial Kuznets curve. Economic Systems, 46(1), 1-14.

Jacoby, H. G., & Skoufias, E. (1997). Risk, financial markets, and human capital in a developing country. The Review of Economic Studies, 64(3), 311-335. DOI: https://doi.org/10.2307/2971716

Khatatbeh, A., & Al-Mulali, U. (2023). Income distribution differences in developed and developing countries: Evidence from the financial Kuznets curve hypothesis. Economic Systems, 47(1), 1-14.

King, R. B., Cai, Y., & Elliot, A. J. (2024). Income inequality is associated with heightened test anxiety and lower academic achievement: A cross-national study in 51 countries. Learning and Instruction, 89, 101825. DOI: https://doi.org/10.1016/j.learninstruc.2023.101825

Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1-28.

Moosa, I. A. (2018). The finance curse: How global finance is making us all poorer. Palgrave Macmillan.

Mustapha, F. G., & Abdullahi, S. R. (2023). Impact of dividend policy on financial performance of listed deposit money banks in Nigeria. FUDMA Journal of Accounting and Finance Research [FUJAFR], 1(1), 129-135. DOI: https://doi.org/10.33003/fujafr-2023.v1i1.12.129-135

Nadabo, Y. S. (2023). Nexus between infrastructure development and manufacturing sector performance in Nigeria: the moderating role of institutional quality. Journal of Economics and Allied Research, 8(1), 151-165.

Nadabo, Y. S. (2023). Revisiting the nexus between remittances and financial sector development in Nigeria. Economic Journal of Emerging Markets, 115-128. DOI: https://doi.org/10.20885/ejem.vol15.iss2.art1

Nikoloski, Z. (2013). Financial development and income inequality: A panel data approach. The Journal of Development Studies, 49(3), 336-348.

Ogunsola, A. (2023). Do Financial Risks affect Financial Performance of Listed Insurance Firms in Nigeria? FUDMA Journal of Accounting and Finance Research [FUJAFR], 1(3), 30-39. DOI: https://doi.org/10.33003/fujafr-2023.v1i3.54.30-39

Özbek, M. K., & Oğul, N. (2022). The financial Kuznets curve in Turkey: Evidence from short and long-term analysis. Journal of Economics, Finance and Accounting, 9(1), 15-26.

Özdemir, Z. A. (2019). Financial development and income inequality: Evidence from emerging market economies. Economic Systems, 43(1), 1-12.

Pata, U. K. (2020). The impact of financial development, urbanization and inflation on income distribution in Turkey. Journal of Economics, 7(1), 1-14.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. DOI: https://doi.org/10.1002/jae.616

Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346. DOI: https://doi.org/10.1093/biomet/75.2.335

Ravallion, M. (2014). Income inequality in the developing world. Science, 344(6186), 851-855. DOI: https://doi.org/10.1126/science.1251875

Rioja, F., & Valev, N. (2004). Does one size fit all? A reexamination of the finance and growth relationship. Journal of Development Economics, 74(2), 429-447. DOI: https://doi.org/10.1016/j.jdeveco.2003.06.006

Seo, J., Kim, J., & Kim, S. (2020). Income inequality and economic growth: Evidence from cross-country data. Economic Modelling, 85, 204-211.

Shahbaz, M., & Islam, F. (2011). Financial development and income inequality in Pakistan: An application of ARDL approach. Journal of Economic Development, 36(1), 35-58. DOI: https://doi.org/10.35866/caujed.2011.36.1.003

Shahbaz, M., Khraief, N., & Uddin, G. S. (2015). The relationship between financial development and income inequality in Iran: Is there any evidence of the financial Kuznets curve? Social Indicators Research, 124(2), 357-382. DOI: https://doi.org/10.1007/s11205-014-0801-9

Sharma, A., Kaur, H., & Kaur, A. (2011). Income inequality and economic growth: Evidence from India. International Journal of Economics and Finance, 3(5), 123-133.

Suhrab, M. A., Chen, S., & Ullah, I. (2024). Income inequality and economic growth: Evidence from South Asian countries. Economic Analysis and Policy, 71, 1-12.

Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66(1-2), 225-250. DOI: https://doi.org/10.1016/0304-4076(94)01616-8

Wilkinson, R. G., & Pickett, K. (2016). The spirit level: Why greater equality makes societies stronger. Bloomsbury Publishing.

World Bank. (2023). World Development Indicators. Retrieved from https://databank.worldbank.org/source/world-development-indicators

Xu, Y., & Zhong, W. (2023). Income inequality, economic growth, and financial development: Evidence from China. Economic Review, 47(1), 1-14.

Wang, Y., & Zhang, Y. (2023). Technological innovation, financial development, and income inequality in China: Evidence from the financial Kuznets curve. Economic Modelling, 100, 1-14.

Wang, Y., Yang, J., & Li, Y. (2023). Income inequality, economic growth, and social stability: Evidence from China. Social Indicators Research, 156(2), 1-18.

Wang, Y., Zhang, Y., & Wang, Y. (2022). Financial development and income inequality: A non-linear relationship. Economic Modelling, 105, 1-10.

Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business & Economic Statistics, 10(3), 251-270. DOI: https://doi.org/10.1080/07350015.1992.10509904

Downloads

Published

29-03-2024

Issue

Vol. 2 No. 1 (2024): March 31, 2024

Section

List of Contents

License

Copyright (c) 2024 FUDMA Journal of Accounting and Finance Research [FUJAFR]

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

The FUDMA Journal of Accounting and Finance Research (FUJAFR) operates a copyright policy that ensures a balance between author rights and wide dissemination of scholarly work.

1. Author Copyright Retention

Authors retain full copyright of their published work without restriction. Submission to FUJAFR does not transfer ownership of copyright to the journal.

2. License to Publish

By submitting a manuscript and upon acceptance, authors grant FUJAFR:

  • The right to publish, reproduce, and distribute the article
  • The right to identify itself as the original publisher of the work

This grant is non-exclusive, meaning authors are free to reuse their work in other contexts, provided proper acknowledgment of the original publication in FUJAFR is made.

3. Licensing of Published Content

All articles are published under the:

Creative Commons Attribution-NonCommercial License (CC BY-NC 4.0)

Under this license:

  • Users may share and adapt the work for non-commercial purposes only
  • Proper attribution to the author(s) and the journal is required
  • Any commercial use requires explicit permission from the copyright holder

4. Author Reuse Rights

Authors are permitted to:

  • Archive their published articles in institutional repositories or personal websites
  • Share their work for educational and research purposes
  • Reuse portions of their work in future publications (e.g., books or other articles), provided proper citation of the original publication is included

5. Third-Party Content

Authors are responsible for obtaining permission to use any third-party copyrighted material (e.g., images, tables, datasets) included in their manuscripts. Proper acknowledgment must be provided where required.

6. Attribution Requirement

All users of FUJAFR content must provide appropriate credit, including:

  • Author name(s)
  • Article title
  • Journal name (FUJAFR) 
  • Year of publication 

How to Cite

Nadabo, Y. S., Dakyong, T. G., & Ismail, H. (2024). Financial Development and Income Inequality in Nigeria: Testing the Financial Kuznets Curve Hypothesis. FUDMA Journal of Accounting and Finance Research [FUJAFR], 2(1), 92-105. https://doi.org/10.33003/fujafr-2024.v2i1.75.92-105

Similar Articles

1-10 of 173

You may also start an advanced similarity search for this article.