Income inequality and deposit money bank profitability in Nigeria: A panel data analysis

Oladipo, Olabisi Rasheedat Income inequality and deposit money bank profitability in Nigeria: A panel data analysis. Social Sciences and Humanities Open.

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Abstract

Nigeria faces persistent challenges of income inequality and poverty, which significantly affect bank performance and profitability. While many studies have investigated the relationship between income inequality and eco�nomic growth, few have examined how this affects bank profitability in developing countries. This study ad�dresses that gap by using panel cointegration to investigate the relationship between income inequality and bank profitability in Nigeria. The study used data from five reputable banks (Zenith Bank, Access Bank, First Bank, United Bank for Africa, and Guaranty Trust Bank) in Nigeria from 2018 to 2023. It applied the Pedroni and Kao cointegration tests, panel fully modified ordinary least squares (FMOLS), and the panel generalized method of moments (GMM). The panel cointegration result indicates a long-run relationship between income inequality and bank profitability. Findings from FMOLS and GMM indicate that Gini coefficient has a negative and significant effect on return on capital employed. Per capita income and inflation rate also have negative but insignificant effects on return on capital employed, while exchange rate has a significantly negative effect on return on capital employed. Additionally, gross savings rate and direct investment show a positive relationship with ROCE; however, despite this positive relationship, they have not contributed to increased bank profitability in Nigeria due to rising income inequality. The findings highlight the adverse effect of income inequality on bank profit�ability in Nigeria, which could, in turn, hinder sustainable development. Therefore, this study emphasizes the need for regulators to facilitate the alignment of banking sector policies with Sustainable Development Goals (SDGs); the government should encourage collaborative strategies with banks to invest in initiatives that drive poverty reduction and reduce inequality, thereby supporting sustainable profitability through social responsibility

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