The Finance-Inequality Nexus in Nigeria: Channels, Thresholds, and Policy Implications

The relationship between financial development and income inequality is theoretically ambiguous and empirically contested, with the finance-inequality literature offering competing hypotheses that have rarely been tested in a comprehensive, structurally identified framework applied to a large and internally diverse developing economy. This study develops a comprehensive theoretical and empirical analysis of the finance-inequality nexus in Nigeria, examining multiple transmission channels and threshold effects using state-level panel data. The theoretical contribution is a two-sector model of financial development and distribution that incorporates the widening hypothesis, whereby initial financial development disproportionately benefits wealthy households, alongside the broadening hypothesis, whereby deeper financial access eventually reduces inequality through the equalisation of investment returns. The model yields a theoretical Kuznets-type curve for the finance-inequality relationship that is empirically testable. The empirical application uses a 36-state plus Federal Capital Territory panel dataset from 2010 to 2022, combining financial development indicators from the Central Bank of Nigeria's branch and credit data, inequality measures from the National Bureau of Statistics income surveys, and state-level institutional quality variables. Dynamic panel models, panel threshold regression, and a mediation analysis identifying credit access, asset accumulation, and labour market channels are employed. A spatial econometric model accounts for geographic spillovers in financial development's distributional effects. The theoretical framework integrates the Greenwood-Jovanovic model, the inclusive growth literature, and the political economy of financial access. The PhD-level contribution lies in the state-level panel analysis, the threshold regression identification of the finance-inequality turning point, and the mediation analysis of distributional channels. Findings carry implications for the Central Bank of Nigeria's financial inclusion strategy and the National Economic Council's inclusive growth agenda. Keywords: finance-inequality nexus, financial development, income inequality, Nigeria, threshold effects