Abstract
The paper intends to study the relationship between the financial sector development
and income inequality in South Africa from the early 1990s to 2015. In 1994, South
Africa transitioned from a system of apartheid to one of democracy; therefore, the
timeline aligns the observation of the standing of income inequality towards the end of
the apartheid system up to the current/modern South Africa. The Autoregressive
Distributed Lag (“ARDL”) model will be used to assess whether there is a short-run
and/or long-run relationship between financial sector development and income
inequality.
The importance of the study is to investigate whether in a developing economy the
financial sector plays a role in reducing inequality through the mobilisation and
allocation of savings into productive investment and making credit available to the
individual.
The literature that is evaluated in the study illustrates different perspective concerning
the impact of the financial sector development and that of income inequality. Primarily,
the conclusion that income inequality is impacted by financial sector development as
a market which aids access to credit permits those with less to be able to access funds
that may be invested in education or various means of betterment. The alternative that
is presented, suggests that those with less are often excluded from these opportunities
presented in a developing financial sector due to lack of knowhow or information and
lack of collateral that allows for easier access to credit.