Microfinance, Financial Development, Foreign Aid, and Income Inequality: Evidence from Sub-Saharan Africa

Abstract

This paper examines the effects of microfinance, financial development and foreign aid on income inequality for 43 Sub-Saharan African (SSA) countries. Panel data for the period 1995–2015 is examined using fixed effects, pooled ordinary least square and system generalized method of moments (GMM) estimation techniques. Findings suggest that although foreign aid plays a determining role in explaining the dynamics of inequality in SSA, it does not appear to be pro-poor. Moreover, the results reveal that both microfinance and financial development contribute to narrowing the income gap between the poor and the rich and to reducing inequality. This implies that providing access to loans through microfinance institutions or bank-based financial system offer to the poor the potential for income-generating activities. Furthermore, the empirical evidence suggests that GDP per capita growth and government expenditures appear to be pro-poor. While a rapid population growth, high levels of inflation, FDI and trade openness are correlated, positively and significantly, with greater income inequality. These results have important policy implications for SSA. Enhancing the efficiency of social protection, promoting progressive taxation and distributional effectiveness of fiscal are crucial to address income inequalities.Keywords: Income inequality, Microfinance, Financial development, Foreign aid, Sub-Saharan Africa  JEL Classifications: C23; D63; F35; O55DOI: https://doi.org/10.32479/ijefi.11277