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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)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Article publication date: 20 July 2020

Issue publication date: 23 January 2021

284

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 reducing income inequality.

Design/methodology/approach

The study uses time-series data on Nigeria from 1980 to 2015 with analysis conducted using the autoregressive distributed lag-error correction model approach of Pesaran et al. (2001).

Findings

The results show amongst others that the channel of real interest rate on income inequality is through bank credit, real interest rate has an indirect relationship to income inequality and bank credit has an equalising impact 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 associated with a 0.45% decline in the volume of bank credit.

Originality/value

This paper engages a new line of argument by unbundling how financial intermediation impacts on income inequality. The extant literature submits that finance directly impacts income inequality, whereas this study investigates further to 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

Acknowledgements

This study draws insights from the author’s 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

Citation

Adeleye, B.N. (2021), "Unbundling interest rate and bank credit nexus on income inequality: structural break analysis from Nigeria", Journal of Financial Regulation and Compliance, Vol. 29 No. 1, pp. 63-78. https://doi.org/10.1108/JFRC-04-2020-0035

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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