The Causal Relationship between FinTech, Financial Inclusion, and Income Inequality in African Economies

Abstract

Income inequality is one of the biggest problems affecting developing economies. Market imperfections and information asymmetry lead to lack of access to the financial system, which will exacerbate income inequality. The growing adoption of FinTech (financial technology) has altered the structure of how financial services are delivered and makes these services accessible to underserved groups. This study explores the causal relationship between FinTech development, financial inclusion, and income inequality in a panel study of 29 African countries. We apply pooled OLS regression and structural equation models to samples from the years 2011, 2014, and 2017. The findings indicate that FinTech has a positive and statistically significant effect on financial inclusion and income inequality in African countries. The study results also demonstrate that financial inclusion plays a pivotal mediation role in the negative effect of FinTech on income inequality in African economies. Further, financial inclusion (the ability to create a bank account and borrow money) negatively and significantly affects income inequality in African countries, whereas saving shows a positive and significant impact on income inequality. Overall, our study results suggest that to reduce income inequality and increase the effectiveness of FinTech investments, policymakers in African countries should design proper policies to enhance financial inclusion and offer more accessible and equitable financial services.