EFFECT OF SMEs LOANS ON INCOME INEQUALITY IN NIGERIA

ABSTRACT: This study provides an empirical investigation into the effects of SMEs loans on incomeinequality in Nigeria during 1990-2018. In addition to SMEs loans, private sector credits and broad moneysupply were introduced into the model following their strong link in the financing of SMEs. Time series datawere sourced from the World and Central Bank of Nigeria Statistical Bulletin. The econometrics tools employedfor the analyses include unit root test, cointegration test and vector error correction mechanism (VECM). Asobserved from the results, all the variables are stationary at first difference. Thus, they are considered as beingintegrated at order one. The cointegration results show evidence of four cointegrating vectors. More importantly,the Vector error correction estimates reveal that SMEs loans and private sector loans have significant negativeeffect on income inequality in the long run. This implies that that increased funding of SMEs providesopportunity for reducing the growing income gap amongst the population. Similarly, the negative long termeffect of private sector financing on income inequality is indicative that private sector funding has potentials ofnarrowing the growing income disparity with Nigeria. Additionally, it was observed from the pairwisecorrelation result that a unidirectional causality runs from SMEs loans to income inequality at 5 percent level ofsignificance. This finding necessitates the rejection of the null hypothesis of no causality. Given the findings, itis recommended amongst others that the monetary authorities especially, the CBN should ensure that monetarypolicy rate is designed to increase the availability of loans to SMEs at investment friendly interest rates in orderto bolters their potentials in reducing income inequality.

Keywords: SMEs loans, Private sector credits, broad money supply, income inequality and Nigeria