Effect of Financial Inclusion on Income Inequality: Evidence from Cross-Country Analysis

Abstract

The objective of this paper is to examine the effect of financial inclusion on income inequality. We use the World Bank’s Global Financial Inclusion database to build our own financial inclusion index and its two components. The estimation of financial inclusion on income inequality for 69 countries indicates that higher inclusive finance associates with lower income inequality. We also find the non-monotonic relationship between financial market size and income distribution for both developed and developing countries. Therefore, one country can narrow income distribution gap by promoting financial inclusion while avoiding the risks of increasing the financial market size. We found the Kunezts’ hyphothesis in case of developing countries while the relationship between income and inequality in developed countries is an U-shape. It confirms the situation of many rich countries where income inequality has risen after recent global financial crisis.

Keywords: financial inclusion, income inequality

JEL Classification: G21, O15