Unbundling interest rate and bank credit nexus on income inequality: structural break analysis from Nigeria

DOIhttps://doi.org/10.1108/JFRC-04-2020-0035
Date20 July 2020
Pages63-78
Publication Date20 July 2020
SubjectAccounting & finance,Financial risk/company failure,Financial compliance/regulation
AuthorBosede Ngozi Adeleye
Unbundling interest rate and bank
credit nexus on income inequality:
structural break analysis
from Nigeria
Bosede Ngozi Adeleye
Department of Economics and Development Studies, Covenant University, Ota,
Nigeria; Regional Centre of Expertise, Ogun, Nigeria and Centre for Economic
Policy and Development Research, Covenant University, Ota, Nigeria
Abstract
Purpose Income inequality stalls economic growth with undesirable socio-economic consequences.
Despite various measures targeted towards reducing the inequality gap, disparities in income distribution
persist in Nigeria. Therefore,this study aims to explore a new line of argument to the f‌inance mechanism in
reducingincome inequality.
Design/methodology/approach The study uses time-seriesdata on Nigeria from 1980 to 2015 with
analysis conducted usingthe autoregressive distributed lag-error correction model approachof Pesaran et al.
(2001).
Findings The results show amongst othersthat the channel of real interest rate on income inequalityis
through bankcredit, real interest rate has an indirect relationshipto income inequality and bank credit has an
equalisingimpact on income inequality when the model is augmented for a structural break.The results show
amongst others, that, on average, ceteris paribus, a 1% point increase in the real lending interest rate is
associatedwith a 0.45% decline in the volume of bank credit.
Originality/value This paper engages a new line of argument by unbundlinghow f‌inancia l intermediation
impacts on income inequality. The extant literature submits that f‌inance directly impacts income inequality,
whereas this study investigates furtherto show that interest rate impacts income inequality through bank credit.
That is, the transmission mechanism by which f‌inance affects income inequality is modelled and analysed.
Keywords Interest rate, Bank credit, Income inequality, Structural break, ARDL-ECM
Paper type Research paper
1. Introduction
In recent times, inclusive policy debates about income inequality have intensif‌ied with
concerns on reducing the widening gap. From essays on income inequality, one of its
principal determinants is access to f‌inance (Levine, 2008;Demirgüç-Kunt and Levine, 2009;
Agnello et al., 2012). Galor and Moav (2006) theorise that the development of f‌inancial
markets will facilitate morehuman capital accumulation by low-income families to mitigate
income inequality. The role of f‌inance is corroborated by Piketty (2014), who shows that
JEL classif‌ication D63, F36, G20, G21, O15, O55
This study draws insights from the authors Doctoral Thesis. Thus, comments received from the
seminars at the Departmental and College Levels are appreciated.
Funding: Not Applicable
Conf‌licts of interest: None
Availability of data and material: Data will be made available upon request
Structural
break analysis
63
Received5 April 2020
Revised15 June 2020
Accepted26 June 2020
Journalof Financial Regulation
andCompliance
Vol.29 No. 1, 2021
pp. 63-78
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2020-0035
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
when the rate of return (the interest rate) exceeds output growth inequality widens as
accumulated wealth grows faster than wages. The reason is that the rich with inherited
wealth save only a portion of theirincome from capital, which grows more quickly than the
economy as a whole. Such persons inevitably become creditors and more dominant over
those who own nothing, which worsens inequality. Hence, the rate of return plays a
signif‌icant role in the f‌inance-inequality theory as it illuminates a variety of direct and
indirect mechanisms through which changes in the operation of the f‌inancial sector can
exacerbate or reduce theinequality of pecuniary opportunity (Beck et al., 2007;Levine,2008;
Demirgüç-Kunt and Levine, 2009). This discourse, therefore, serves as the studys
motivation for theexamination of income inequality within a f‌inancialsystem framework.
Relative to the studies on poverty levels (Aigbokhan,2000, 2008;Osahon and Osarobo,
2011;Nuruddeen and Ibrahim,2014;Kolawole et al.,2015;Ogbeide and Agu, 2015), there are
sparse studies on income inequality in Nigeria, which has been rising sharply. Rising
inequality leads to less stable and more violent and conf‌lictive societies with protests
centred around issues such as corruption, rising utility prices, growing inequality and the
visibly-increasing concentration of economic power in multi-nationals (Africa Tax and
Inequality Report,2014).
Considered as one of the fastest-growingeconomies in the world (AfDB, 2012;Africa Tax
and Inequality Report, 2014;World Bank, 2015) and despite the abundant human and
natural resources, Nigeria has been witnessing an increasing rate of socio-economic
challenges. Some of which are not limited to the rising farmers-pastoralists conf‌licts from
the Northern and South-Westernparts of the country, which claimed several lives led to loss
of incomes and livelihoods. Similarly, violent conf‌licts from militant sects based in the
South-South Niger Delta oil region, Boko Haram Islamic militant sect from the North East
and the Middle Belt tribal conf‌licts have undermined the economicpower of the people and
country in general (Mercy Corps,2015). Besides, high rate of poverty both at the regions and
at the national level, high unemployment rate, high-income inequality, low-quality human
capital, a high percentage of the population on welfare and high emigration in the face of
harsh economic realities (Odedokunand Round, 2001;Ogbeide and Agu, 2015) are the stark
realities of present-dayNigeria.
Figure 1 reveals the pattern of income inequality in Nigeria. In 1980, the Gini index was
50.61 and rose to 60.07 in 1992, dipped slightly to 58.77 in 1996, climbed again to 58.87 in
2009 before a downward trend to 48.83in 2015.
On documented issues, inequality moderates with an increase in per capita gross
domestic product (GDP) (van der Hoeven, 2010;Delis et al.,2014;Davtyan, 2016;Adeleye
et al., 2017). Some studies argue that inequality reduces via human capital through equal
access to quality education at all levels (Barro, 2008;Lo Prete, 2013). Inequality declines
through the eradicationof corruption and the existence of quality institutions (Kar and Saha,
2012;Li and Yu, 2014). In the same vein, some argue that inequality increases with
inequitable government spending on social infrastructure/development (Chatterjee and
Turnovsky, 2012); high unemployment rate (Østergaard, 2013) and trade openness
(Dastidar, 2012),just to mention a few.
In contributing to the inequality literature, this study situates within three theoretical
frameworks, namely, the extensive and intensive margin theories and the liquidity theory.
The extensive margin theory borders on broadening the availability of f‌inancial services to
individuals excluded from the use of f‌inancial services due to price or discrimination
(Odhiambo, 2014;Orji et al.,2015;Chiwira et al., 2016). That is, f‌inancial development will
increase the economic opportunities of those who are at a disadvantage and reduce the
cross-dynasty persistence of relative incomes (Becker and Tomes,1979, 1986;Greenwood
JFRC
29,1
64

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