A reexamination of the Financial Kuznets Curve (FKC) hypothesis in sub-Saharan African countries: evidence from disaggregated data

Abstract

This study examines the relationship between financial development and income inequality using data from 21 SSA countries over the period 1994–2016. The SSA region is home to some of the countries with the highest levels of income inequality worldwide. The main objective of the study is to test the validity of the Financial Kuznets Curve hypothesis in these countries. The analysis employs a wide range of robust panel-data techniques, including the dynamic OLS, fully modified OLS, and Driscoll–Kraay estimators, to investigate this relationship. Furthermore, the study divides the sampled countries into three groups: low-income, middle-income, and all SSA countries. The study also uses three proxies for financial development. Overall, the study finds no strong evidence in support of the Financial Kuznets Curve hypothesis in SSA. Instead, the results indicate that a U-shaped relationship is more prominent. These results show that at the initial stages, income inequality in SSA tends to decrease as financial development increases, but thereafter it increases once countries reach a certain threshold. As the financial sector in SSA develops, it disproportionately benefits the rich, who have greater access to financial services such as loans and investment opportunities, which ultimately increases the gap between the rich and the poor.