The Impact of Financial Institution Development on Income Inequality: The Case of Ethiopia

Abstract

The study investigates the link between financial institution development and income inequality in Ethiopia. Econometrics frame work (analysis) was employed as a general method of analysis using secondary data collected from national bank of Ethiopia (NBE), central statistical authority (CSA), MOFED and EEA. The study covers for 33 years from 1980 to 2012. The Engle Granger two steps procedure is followed to estimate the long run and short run parameter for the variables included in the model. The empirical result of the study shows that broad money to GDP ratio, GDP, credit and openness are the main determinates of income distribution (inequality) in Ethiopia in the long run. In the short run only broad money to GDP ratio is the main determinant of income inequality. All these variables except openness and broad money have decreasing effect on income inequality. The policy implication of the result implies that among other things government should motivate more for domestic trade than international trade. It should be selective in export and import trade. Government should create awareness for the mass rural population about the importance of formal financial institutions. Distribution and expansion of financial institutions from urban to rural areas, Provide incentives, licensing and other important measure to improve equitable distribution of national resources.