The Impact of Financial Development on Nigeria’s Social Welfare and Inequality

By: Okezie A. Ihugba, Precious C. Akobundu, Pamela A. Ndukwe-Ani

Pages: 18–40, Volume: 2, Number: 2

Published by: AEFUNAI Journal of Economics, Finance and Development Studies, Alex Ekwueme Federal University, Ndufu-Alike, 9/1/2025, 2025

ISSN (Electronic): 2536-6742

DOI: 10.48028/iiprds/aefunaijefds.v2.i2.02

The Impact of Financial Development on Nigeria's Social Welfare and Inequality

Abstract:

This study investigates the asymmetric effects of financial development on income inequality in Nigeria using the Nonlinear Autoregressive Distributed Lag (NARDL) model for the period 1981 to 2024. By decomposing financial development into positive and negative changes, the study explores whether the impact of financial expansion differs from financial contractions in shaping income distribution. The results reveal that income inequality in Nigeria is persistent, with past levels significantly inEuencing current outcomes. Positive changes in financial development initially exacerbate inequality, as early access tends to favor higher-income groups. However, over time, inclusive financial development contributes to reducing inequality, suggesting a delayed redistribution effect. Conversely, negative financial development shocks worsen inequality in the long run, highlighting the vulnerability of low-income groups during financial regressions. Credit to the private sector is found to have an inequality-reducing effect, while broader financial access initially benefits the affiuent before trickling down. Social welfare policies and economic growth exhibit mixed impacts, with delayed but meaningful contributions to inequality reduction. The study concludes that while financial development has the potential to reduce inequality, its benefits are not automatic and depend on the depth, direction, and inclusiveness of reforms. Policy recommendations emphasize inclusive financial strategies, better-targeted welfare programs, and sustained credit support for marginalized populations.

Keywords: Financial development, Social welfare, Income inequality, Financial deepening, Nigeria