Abstract:

Liquidity constraints have impeded credit availability and have long been a significant factor to financial inclusion and sustainable development in Africa.  Despite numerous micro-finance facilities, international development funding and grants and government incentives, Africa has the largest proportion of financially marginalised people in the world. This study poignant and examines the relationship between liquidity constraints and income inequality in Africa using data from a sample of 43 African countries between 2000 and 2013. Econometric method based on pooled Ordinary Least Squares (OLS) estimation method was used for data analysis. The study shows that all the financial variables have significant negative effect on income inequality in Africa. This implies that financial sector liquidity will enable banks grant more credit facilities, particularly to the poor and financially vulnerable people and by so doing, significantly reduces income disparity. In addition, there is evidence of significant positive impact of GDP on inequality in Africa; an indication that at higher levels of GDP, the inequality gap widens. Also, the estimated coefficient for government spending is positive and statistically significant indicating that a rise in government spending is associated with higher levels of inequality.  These findings suggest that the adverse distributional consequences of income inequality can be mitigated through adequate financial reforms that promote credit availability. It is therefore recommended that policies on financial inclusion be implemented in order to reach out to the unbanked, particularly in the rural areas, while access to credit, by the poor and financially vulnerable should be enhanced.  In addition, institutional reforms, export promotion and population control is recommended as antidote to the widening income gap in the continent.