The effect of financial inclusion on bank stability: Evidence from ASEAN

Abstract

After the recent global financial crisis of 2008, the attention of researchers and politicians has focused on both financial inclusion and bank stability. However, we still know little of how the former impacts the stability of financial services providers. This paper focuses on financial inclusion and its influence on bank stability. By using a sample of 102 banks in six countries of ASEAN over the period 2008–19, we achieve the result that the index of financial inclusion has a positive relationship with Zscore and a negative effect on the standard deviation of deposit growth rates and nonperforming loan ratio, which also means that higher level of financial inclusion contributes to greater bank stability. Or, to make it clearer, in an inclusive financial sector, those banks can increase more stable customer deposits and safe loans by providing banking services. The indices calculated for each dimension of financial inclusion, including accessibility, availability, and usage of the formal bank system, also have the same results. Our findings have important policy implications that ASEAN policymakers do not have to face a tradeoff between focusing on reforms to promote financial inclusion and focusing on further improvements in bank stability.

Keywords:

• financial inclusion
• bank stability

JEL Classifications:

• G18
• G21
• G28
• F65.

PUBLIC INTEREST STATEMENT

This article aims to the analysis of the impact of financial inclusion on bank stability. We use an index of financial inclusion (IFI) on three dimensions and also use a separate inclusive finance index for each dimension. What is different about this article compared to previous studies is that we use not only Zscore but also the standard deviation of deposit growth rate and nonperforming loan ratio. These two variables both measure bank stability and represent the two main channels for the effect of financial inclusion on bank stability. We find empirical evidence on the positive impact of financial inclusion on bank stability. Finally, the end of the study suggests policy implications related to improving financial inclusion to promote bank stability in ASEAN countries.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. ASEAN is an acronym for the Association of Southeast Asian Nations. In this paper, we use a sample of six countries, including Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam, representing the entire ASEAN because the total asset value of the banking systems of these countries accounted for more than 90% of the ASEAN region from 2014 to 2017, and more specifically, it accounted for nearly 97.23% in 2017 (the authors calculate this result with data from World Bank, 2017).

2. We use data from World Bank (2017) to calculate Private Credit by Deposit Money Banks Ratio and Stock Market Total Value Traded Ratio (according to Aslh Demirgiiu-Kunt & Levine, 1999; Levine, 2002). We find that the former ratio is higher than the latter, which means ASEAN countries’ financial systems are bank-based.

3. Trung Duc Nguyen: the ORCID iD: https://orcid.org/0000-0002-4559-6966

Quynh Lan Thi Du: the ORCID iD: https://orcid.org/0000-0002-5524-776X

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Trung Duc Nguyen

Trung Duc Nguyen, Associate Professor in Finance & Banking, is now working as Deputy President, Banking University HCMC. He got plenty of awards and grants, such as Certificate of Merit of the Governor of the State Bank of Vietnam for contributions to the science and technology activities of the Banking sector in 2014; the certificate of an excellent completion of scientific and technological tasks in 2011, 2012, 2013 (awarded by The Director of the Banking Academy of Vietnam). The preferred fields of research in financial economics, banking, etc.

Quynh Lan Thi Du, PhD in Finance and Banking, is currently a lecturer at the Faculty of Finance, Banking University HCMC. Research conducted on Corporate Finance, Financial Inclusion, Banking, etc.