Foreign Bank Presence and Income Inequality in Africa: The Moderation role of Economic Freedom

The paper contributes to the existing literature in four main ways: firstly, by investigating the direct impact of Foreign Bank Presence (FBP) on income inequality in Africa. Secondly, by exploring the threshold effect of FBP on income inequality. Thirdly, by analyzing the direct influence of economic freedom and its components on income inequality. Fourthly, by examining the combined impact of FBP and economic freedom on income inequality in Africa.

The study utilizes macrodata spanning 19 years (1995 to 2013) for 33 African countries due to data availability. Income inequality data (Gini Index after tax) is sourced from the Standardized World Income Inequality Database, while foreign bank presence and economic freedom variables are from Claessens and van Horen (2015) and the Heritage Foundation, respectively. Control variables are sourced from the World Development Indicators. The Gini index ranges from 0 to 100, with lower values indicating greater equality (0) and higher values indicating greater inequality (100). Foreign bank presence is proxied by the percentage of foreign banks among total banks per country. Economic freedom is measured using the Economic Freedom Index (EFI), which ranges from 0 to 100 and comprises 12 individual indicators grouped into four components: rule of law, government size, regulatory efficiency, and open market. Control variables include population growth, trade openness, human capital, economic growth, private credit, and inflation.