Does Financial Inclusion Induce Financial Stability? Evidence from Cross-country Analysis

Abstract

In recent times, financial inclusion and financial stability issue have become a priority on policy agendas across the world. However, there is relative dearth of empirical studies addressing and establishing the link between the same. This study fills this gap. Using panel data of 2001-2013, this study empirically investigated whether financial inclusion contributes to country's financial stability, measured by Z-score. Robust results from GMM dynamic panel data estimator show that financial inclusion variables as measured by number of SME borrowers to total borrowers and ratio of outstanding SME loans to total loans have significant positive contributions to financial stability. Findings also indicate that GDP per capita, liquidity, proportion of private credit to GDP are positively and proportion of domestic credit provided to private sector and financial crisis are negatively associated with financial stability. Empirical findings of this study is of greater significance to the policymakers as it will invoke the attention of governments and policymakers to undertake such policies to accelerate financial inclusion of their countries which in turn will lead to country's greater financial stability. This study also contributes to empirical literatures of the issue of financial inclusion and financial stability by reconfirming (or otherwise) findings of previous studies. KeywordsFinancial stability, financial inclusion, financial openness, GMM dynamic panel estimator, robustness. AbstractIn recent times, financial inclusion and financial stability issue have become a priority on policy agendas across the world. However, there is relative dearth of empirical studies addressing and establishing the link between the same. This study fills this gap. Using panel data of 2001-2013, this study empirically investigated whether financial inclusion contributes to country's financial stability, measured by Z-score. Robust results from GMM dynamic panel data estimator show that financial inclusion variables as measured by number of SME borrowers to total borrowers and ratio of outstanding SME loans to total loans have significant positive contributions to financial stability. Findings also indicate that GDP per capita, liquidity, proportion of private credit to GDP are positively and proportion of domestic credit provided to private sector and financial crisis are negatively associated with financial stability. Empirical findings of this study is of greater significance to the policymakers as it will invoke the attention of governments and policymakers to undertake such policies to accelerate financial inclusion of their countries which in turn will lead to country's greater financial stability. This study also contributes to empirical literatures of the issue of financial inclusion and financial stability by reconfirming (or otherwise) findings of previous studies.JEL Classification: G21, G28, O16.

The role of financial inclusion in financial stability: lesson from Jordan

“…This result indicates that the higher the income at the country level, the higher FS. This result coincides with the finding of Siddik et al (2018). Similar to the finding of Morgan and Pontines (2014), a negative and significant relationship between DCGDP and FS was found in the current article.…”

“…In developing countries, banks consider it as a key component of the financial system and thus, the most important determinant of the financial stability of the country. In contrast, the FS in the developed countries depends on the non-banking financial institutions such as insurance corporations and brokerage firms (Siddik et al, 2018). Garcia (2016) argued that the definition of FS commonly relates to the functions of the financial system, which are allocating savings to investments and the resistance of financial shocks.…”

“…A negative sign is expected to be found for DCGDP. As mentioned by Siddik et al (2018), the higher proportion of credit to private sector could increase the financial resources to a specific sector, which leads to financial instability. In the line of Neaime…”

“…FS refers to the ability of the financial system to withstand shocks, and circumscribes their consequences (Creel, Hubert, & Labondance, 2015). Several previous studies established a link between FI and FS (Neaime & Gaysset, 2018;Siddik et al, 2018). At banks' level, even in crisis periods, low income customers maintain constant depositing and borrowing behavior.…”

Contributory factors towards sustainability of bank-linked self-help groups in India

“…In addition, financial inclusion is positioned as an enabler of the 2030 Sustainable Development Goals. 1 Even though the Goals do not explicitly target financial inclusion, greater access to financial services has a significant role to play in attaining many of them, including those aimed at reducing poverty, creating jobs and improving gender equality (Klapper, EL-Zoghbi and Hess, 2016), and is also known to positively contribute to a country's financial stability (Siddik and Kabiraj, 2018). Based on this background, the focus of this study is on the Indian flagship financial inclusion programme -the Self Help Group-Bank Linkage Programme.…”