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

Investigating the Link Between Macroeconomic Factors and Income Inequality of Asian Countries

“…The p-value above 10% significance level concludes that the impact of interest rate on income inequality is statistically insignificant and income inequality is not affected by interest rate in Asian countries. These results are inconsistent with findings of (Adeleye, 2020;Furceri et al, 2016). Our results are also inconsistence with the results of (Mumtaz & Theophilopoulou, 2017) as they found positive and significant relationship between interest rate and income inequality.…”

“…Findings revealed that significant and positive relationship exists between income inequality and interest rate. Adeleye (2020) reviewed the interest income inequality nexus through the channel of bank credit in Nigeria. To study the interest income inequality nexus, he examined the data from the period 1980 to 2015 and found that positive relationship exists between both variable however increase in interest rate reduces the volume of bank credit.…”

Comparative investigation of the growth-poverty-inequality trilemma in Sub-Saharan Africa and Latin American and Caribbean Countries

“…From the literature, the most significant poverty-reducing agent is economic growth (Dollar and Kraay, 2002;Fosu, 2009Fosu, , 2015Fosu, , 2017Garza-Rodriguez, 2018;Iyke and Ho, 2017). However, African countries in particular are experiencing high growth rates without the (Adeleye et al, 2017;Adeleye, 2020). This anomaly is due to the influence of inequality in the conversion of growth to poverty reduction, and the distributional effect of economic growth.…”

The Effect of Return on Asset (ROA), Operational Efficiency Ratio (BOPO), Inflation, Credit Interest Rate and Gross Domestic Product (GDP) towards Murabahah Financing in Sharia Banking in Indonesia (2016-2019)

“…Credit Interest Rate in Sharia banking is formed because of the suspension of payments which gives the impression that Murabahah financing is no different from the provision of interest-bearing loans by conventional banks. Credit interest rates rise faster when the benchmark interest rate rises, while when the benchmark interest rate falls, banking credit interest rates remain relatively unchanged or change slowly [11].…”