The Impact of financial Inclusion on financial Stability: review of Theories and international Evidence

Figures & data

Table 1. Dimensions and proxies of financial Inclusion.

	Dimension	Proxy
Access	The ready availability or opportunity to use formal financial services and products. The physical ability of economic agents to reach financial services easily.	Number of automatic teller machines (ATMs) per 100,000 adults or per 1000 km square. Number of bank branches per 100,000 adults or per 1000 km square.
Use	Economic agents’ actual use of formal financial services and products.	Percentage of adults with at least one type of regulated deposit account Percentage of adults with at least one type of regulated loan account. Number of household depositors per 1000 adults. Number of household borrowers per 1000 adults.
Cost	Costs associated with accessing and using formal financial services and products, both monetary and non-monetary.	Average cost of opening a basic bank account Average cost of maintaining a basic bank account Average cost of credit transfers.
Quality	Whether the financial services and products meet the needs of the consumers and how well the consumers are informed and knowledgeable about them and use them in a safe, formal, and well-regulated space.	Financial literacy / financial knowledge score. Disclosure requirements. Formal internal and external dispute resolution frameworks / mechanisms.

Source: Authors’ own compilation based on Espinosa-Vega et al. (2020); Pesqué-Cela et al. 2021; Beck, Demirgüç-Kunt, and Levine (2007); Amidžic, Massara, and Mialou (2014); Queralt (2016).

Table 2. Definition of financial inclusion by various international organizations.

Standard Setting Body	Financial Inclusion Definition
International Monetary Fund (IMF)	Widespread access to formal financial services, including income, safe money storage, borrowing, and insurance, thereby benefiting financially integrated economic agents who can access fundamental financial services and products.
World Bank	Equal access to basic financial products and services for individuals and businesses in a responsible and sustainable manner.
Alliance for Financial Inclusion (AFI)	Consistent use of high-quality financial products and services by households and businesses, provided by authorized providers, to manage cashflows and mitigate shocks.
Bank of International Settlements (BIS)	Provision of accessible, affordable, secure, effective, transparent, and high-quality financial products and services to businesses and households, ensuring efficient financial system operation through a sound financial infrastructure, meeting customer needs.
Organization for Economic Co-operation and Development (OECD)	Ensuring affordable, timely, and adequate access to financial products and services for all societal segments through tailored approaches, financial awareness, and education, promoting financial wellbeing and economic and social inclusion.

Source: Authors’ own compilation based on OECD (2013), Amidžic, Massara, and Mialou (2014), Sahay et al. (2015), World Bank (2018), AFI (2017).

Table 3. Core financial soundness indicators for deposit takers.

Capital Adequacy	Regulatory capital to risk-weighted assets Tier 1 capital to risk-weighted assets Nonperforming loans net of provisions to capital Common Equity Tier 1 capital to risk-weighted assets Tier 1 capital to assets
Asset Quality	Nonperforming loans to total gross loans. Loan concentration by economic activity Provisions to nonperforming loans
Earnings and Profitability	Return on assets. Return on equity. Interest margin to gross income Noninterest expenses to gross income
Liquidity	Liquid assets to total assets (liquid asset ratio) for all Deposit Takers (DTs) Liquid assets to short term liabilities for all DTs Liquidity Coverage Ratio for the DTs that have implemented Basel III liquidity standards. Net Stable Funding Ratio for the DTs that have implemented Basel III liquidity standards
Sensitivity to market Risk	Net open position in foreign exchange to capital

Source: Authors’ compilation based on San Jose and Georgiou (2008) and IMF (2008).

Table 4. International Standard Setting Bodies and their definition of financial stability.

Standard Setting Body	Financial Inclusion Definition
International Monetary Fund (IMF)	A stable financial system is one that comprises risk management, shock absorption, and economic process enhancement, ensuring the potential to eliminate both internal and external financial imbalances from unforeseen events while not hindering an economy's performance.
World Bank	A stable financial system efficiently allocates resources, manages risks, maintains employment levels, and eliminates price movements that could disrupt monetary stability or employment. Its self-corrective capabilities prevent adverse events from disrupting the real economy or other financial systems.
Bank of International Settlements (BIS)	A stable financial system must withstand shocks and financial imbalances, preventing severe disruptions that could affect savings allocation to profit-generating investments.
European Central Bank (ECB)	A stable financial system is one that can withstand major disruptions to ensure the effective functioning of financial intermediation and investment despite shocks.

Source: Authors on compilation based on Schinasi (2004); World Bank (2015); Gadanecz and Jayaram (2008); Jeanneau (2014); ECB (2012).

Figure 1. The Linkages between Financial Inclusion and Financial Stability. Source: Authors’ own compilation.

Table 5. Summary of empirical studies reflecting relationship between financial inclusion and banking sector stability.

Author	Region/Country	Study Period	Inclusion Proxy	Stability Proxy	Control variables	Method	Impact of Financial Inclusion on Financial Stability
Amatus and Alireza (2015)	35 SSA countries	2004–2011	Outstanding deposits with commercial banks and outstanding loan from commercial banks	Banks’ z-score	GDP per capita, inflation, domestic credit provided to private sector by banks, and financial crisis indicator	Dynamic GMM model	(−)
Al-Smadi (2018)	Jordan	2006 - 2017	Jordanian financial inclusion index	Jordanian financial stability index	Domestic credit to private sector, financial integration indicator, financial crisis indicator	FMOLS	(−)
Abdulkarim and Ali (2019)	47 OIC countries	2006 - 2016	ATMs, bank branches per 100,000 adults; deposit accounts with commercial banks	Bank Z-score	Inflation, GDP per capital and the population growth rate.	Static and dynamic panel estimation and quantile regression techniques	(+)
Anthony-Orji et al. (2019)	Nigeria	1986–2013	Rural deposits	Banks’ Z-score	Measures of financial development, interest rate spread, and a measure of financial development.	ARDL-UECM model.	(+)
Anarfo et al., (2022)	50 African countries	2006 - 2017	Financial inclusion index	Banks’ Z-score	Composite index of banking sector development and net interest margin	Panel VAR	(+)
Brei, Gadanecz, and Mehrotra (2020)	15 advanced and 17 emerging economies	2007 - 2015	Real growth rate of commercial banks’ loans to SMEs	Banks’ Z-scores	Real growth in rate of total credit to private non-financial sector, Real GDP growth, Average lending rate	Dynamic panel equation	(+)
Banna and Alam (2021)	213 banks of 4 ASEAN countries	2011–2019	Financial inclusion index	Banks’ Z-score	Ratio of total loans over total assets, total assets, ratio of loan loss provision on total loans and non-interest income to total operating income	OLS, two-step dynamic system GMM, and panel corrected standard errors techniques	(+)
Čihák, Mare, and Melecky (2016)	157 countries from low-, middle – and high-income areas	2007 - 2014	Indicators of provision of credit, Savings, account ownership, indicators of the use of credit, savings for business purposes, account ownership and payments	Proxies for solvency of financial institutions, financial institutions liquidity positions, financial institutions exposure to credit risk, standard deviation in credit growth, deposits growth at the country level, banking output loss, •costs of government intervention to mitigate and resolve crisis, peak of realized credit risk	GDP per capita growth (annual %), Population density (people per sq. km of land area), Domestic credit to private sector (% of GDP), Age dependency ratio (% of working-age population), Mobile cellular subscriptions (per 100 people), Quality of supervision, Fiscal freedom	Distribution of pairwise correlation coefficient	(−)
Dienillah, Anggraeni, and Sahara (2018)	19 high, lower, and upper middle-income countries	2004–2014	Financial inclusion index	Albulescu and Goyeau index	Ratio of private credit from bank deposits and other financial institutions of GDP, financial openness	Tobit model	(+)
Danisman and Tarazi (2020)	4168 banks in 28 EU countries	2010 - 2017	Account ownership and digital payments	Leverage risk; portfolio risk; Bank Z-scores	Bank size, loan share and deposit share; real GDP growth; inflation	Two-step system GMM	(+)
Feghali, Mora, and Nassif (2021)	100 low-, middle – and high-income countries	2011, 2014 and 2017	Credit access	Banks’ Z-score	GDP growth (annual %), Domestic credit provided by financial sector (% of GDP), Financial openness index, Total population, log, Governance principal component index	Dynamic panel regression model	(−)
Ghassibe, Appendino, and Mahmoudi (2019)	Countries from the Middle East and Central Asia (MECA) regions	1990 - 2017	SME financial inclusion index	Short-term nominal interest rates	Output gap; measure of inflation	Panel VAR	(+)
Hakimi, Boussaada, and Karmani (2022)	112 banks from 10 MENA countries	2004 - 2017	Measures of access and usage of financial services	Bank Z-score, portfolio risk, and leverage	Inflation, GDP growth bank size; credit risk	System GMM	(+)
Jungo, Madaleno, and Botelho (2022)	46 SSA and 31 LAC countries	2005 - 2018	Financial inclusion index	Bank Z-score	Measure of bank regulation; and bank competitiveness	FGLS model	(+)
Khan et al. (2022)	54 African countries	2001 - 2019	No. of ATM / 100,000 adults and deposits with commercial banks per 1000 adults	ratio of credit-to-GDP	Inflation, GDP per capita, population growth, trade openness and financial integration	Multiple regression models	(+)
Morgan and Pontines (2018)	164 advanced, emerging market and developing countries	2007 - 2015	Outstanding commercial bank loans to SMEs as a proportion of banks’ total loan book	Banks’ Z-score, Non-performing loans	GDP per capita, Liquid assets to deposits and short-term funding, Ratio of non-FDI investment capital flow to GDP, Private sector credit by deposit money banks and other non-financial institutions to GDP, • Financial openness	System-GMM dynamic panel equation	(+)
Matsebula and Sheefeni (2022)	South Africa	2004 - 2020	Commercial bank branches per 100,000 adults and number of ATMs per 100 000 adults	Banks’ Z-score	GDP, private credit by deposit money banks and other financial institutions to GDP (%), and liquid assets to deposits and short-term funding (%).	Engle-Granger approach to Error Correction Model (ECM)	(+/−)
Neaime and Gaysset (2018)	MENA countries	2002 - 2015	ATMs per 100,000 adults and Banks per 100,000 adults	Volatility in total commercial bank deposits	Population size, measure of financial integration and the average growth in gross national income	GMM and GLS models	(+)
Naceur, Candelon, and Lajaunie (2019)	98 countries	1980–2016	Systemic financial market failures data	measures of financial depth, and efficiency.	GDP growth rate, interest rate spread, 3 − month monetary rate	Dynamic panel logit model	(−)
Negm (2021)	Egypt	2020–2021	Access and usage indicators of financial inclusion	Capital to total assets; credit to deposits; short term debt bank lending rate; deposit rate	N/A	Descriptive approach within deductive method and a sample of 96 respondents	(+)
Operana (2016)	Philippines	2002:4–2015:4	Number of physical banking institutions; loans to MSMEs	NPL as a proportion of gross loans; liquid assets to deposits	Log of GDP per capita	Reduced form VAR	(+)
Pal and Bandyopadhyay (2022)	104 developed and developing countries	1984–2018	Financial inclusion index	Banks’ Z-score, bank credit to bank deposits (%), liquid assets to deposits, and short-term funding (%)	GDP per capita	FMOLS and DOLS model.	(+)
Siddik, Alam, and Kabiraj (2018)	217 advanced, emerging and developing market economies	2001−2013	Number of SME borrowers to total borrowers, Ratio of outstanding SME loans to total loans	Banks’ Z-scores	GDP per capita, Ratio of M2 to GDP, Liquid assets to deposits, Domestic credit to private sector	GMM dynamic panel estimator	(+)
Saha and Dutta (2021)	92 countries across various income and economic groupings	2004−2014	No. of bank branches and number of ATMs per 100,000 people, number of bank branches and number of ATMs per 1000 km2	Banks’ Z-score	Measure of financial depth, GDP per capita, banks’ capital to total assets ratio and provision for NPLs	Two-step GMM model and a two-stage least square model	(+)
Vo, Nguyen, and Van (2021)	3071 banks in the Asian region	2008−2017	Financial inclusion index	Banks’ Z-score	GDP per capita, GDP growth and loan provision	GMM	(+)
Wang and Luo (2022)	36 emerging economies	2004–2018	financial inclusion index	Banks’ Z-score	A measure of bank size, liquidity, market structure, noninterest income, and GDP growth	Annual data from 2004 to 2018 and a dynamic panel data model.	(+)

Note: (+); (−) and (+/−) represent positive, negative, and mixed impacts of financial inclusion on financial stability, respectively.

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