Financial inclusion, income inequality and financial dollarization in Nigeria: An empirical analysis

Abstract

This study examines the impact of financial inclusion and financial dollarization on income inequality in Nigeria. Newey-West estimation technique was used to address the problem of heteroscedasticity and autocorrelation in the time series data. Three key financial inclusion indicators were used (number of bank accounts, number of bank branches per capita and number of ATMs), and a financial dollarization variable measured as a foreign currency deposits as a percentage of total deposits. The results shows that increase in financial inclusion through the expansion of bank accounts and branches statistically reduces income disparity. This effect is evident under dollarized financial environment where the interaction between financial inclusion and financial dollarization amplifies the inequality reducing impact. Conversely, financial dollarization on its own worsen income inequality, signifying the dual role of financial inclusion as both a preventer and enhancer of income disparity in a dollarizing economy. Furthermore, the study finds that higher inflation rate and interest rate also aggravate income inequality. Whereas, government spending shows a complex relationship, with slight increases in inequality observed at the margin. The findings underscore the importance of targeted financial and economic policies that enhance financial inclusion to mitigate the adverse effects of dollarization and promote more equitable income distribution. The study's methodology ensures robust and reliable estimates, providing valuable insights for policymakers in emerging economies coping with income inequality and financial instability.