Does financial inclusion enhance financial stability? Evidence from a developing economy

Abstract

In response to the global 2007–2009 financial crisis, central banks and policy makers globally, have spearheaded reforms aimed at improving financial stability. At the same time, a lot of effort and resources have been devoted to access and use of quality financial services by both households and firms. Existing literature suggests both positive and negative impact of financial inclusion on financial stability, but this is yet to be empirically validated. This paper investigates the effect of financial inclusion on financial stability in Kenya. Estimation results reveals that financial inclusion enhances financial stability. Therefore, policies that promote greater financial inclusion would boost financial stability.

Keywords:

• Financial inclusion
• structural equation model
• financial stability
• bank Z-scores
• non-performing loans

JEL CLASSIFICATION::

• G21
• G28
• O16

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 FSD Kenya and Central Bank of Kenya. FinAccess National Survey 2019: Profiling developments in financial access and usage in Kenya. Nairobi, Kenya: FSD Kenya.

Additional information

Notes on contributors

Antony R. Atellu

Antony R. Atellu is a lecturer at Laikipia University. He specializes in Monetary economics, financial economics and accounting.

Peter W. Muriu

Peter W. Muriu is a senior lecturer at University of Nairobi. He specializes in Monetary economics and financial economics.