Does financial inclusion promote financial stability? Evidence from Africa

Figures & data

Table 1. Variable definition and descriptive statistics

Variables	Description	Data source	Mean	Median	Std. dev.	N
Bank Z-score (Z-SCORE)	Natural logarithmic of bank z-scores. It captures the risk of default or the financial stability of the commercial banking system	Global Financial Development Database and authors’ own calculation	2.724	2.760	0.462	784
Account at a formal financial institution (ACCOUNT)	The percentage of individuals older than 15 and owning an account at a formal financial institution (bank, credit union, etc.)	Global Findex Database	24.520	20.445	17.710	987
GDP per capita(GDPPERK)	Gross domestic product divided by midyear population(thousands $)	World Development Indicators	2.491	1.150	3.236	942
GDP growth (BUSCYCLE)	Real GDP growth rate	World Development Indicators	−0.151	0.117	6.032	1006
Inflation(INFLATION)	Measured by the consumer price index, it reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services (%)	World Development Indicators	6.643	4.948	7.048	872
Real interest rate (RIR)	The lending rate adjusted for inflation as measured by the GDP deflator (%)	World Development Indicators	7.083	6.350	12.349	713
Broad money as share of GDP (BROADMON)	Ratio of broad money (M2) to GDP (%)	World Development Indicators	7.128	2.310	3.565	873
Financial crisis (CRISDUM)	A binary variable equal to 1 for the years 2007 and 2008 and 0 otherwise	Authors’ own calculation	0.095	0	0.294	1134
Bank concentration (BKCONC)	Assets of five largest banks as a share of total commercial banking assets	Global Financial Development Database	75.276	76.247	18.133	790
Financial freedom(FINFREE)	Measure of the extent of government regulation of financial services and its influence on the allocation of credit ranged [0.100]	Heritage Foundation	42	40	14.525	908
Rule of law(RULEOFLAW)	Captures perceptions of the extent to which agents have confidence in and abide by the rules of society	Kaufmann et al. (2010)	−.0.646	−0.690	0.594	952

This table presents the description and source of the main variables. We also report basic summary statistics including the mean, standard deviation and number of observations of the variables. The panel covers 38 African countries for the period 2001–2017.

Table 2. Correlation of the variables

VARIABLES	Z-SCORE	ACCOUNT	GDPPERK	BUSCYCLE	INFLATION	RIR	BROADMON	CRISDUM	BKCONC	FINFREE	RULEOFLAW
Z-SCORE	1.000
ACCOUNT	0.183***	1.000
GDPPERK	0.259***	0.671***	1.000
BUSCYCLE	−0.046	−0.010	0.012	1.000
INFLATION	−0.107***	0.011	−0.136***	−0.068**	1.000
RIR	0.046	−0.115***	−0.161***	0.025	−0.107***	1.000
BROADMON	0.000	−0.089**	−0.050	−0.024	0.049	−0.274***	1.000
CRISDUM	−0.023	−0.054*	0.011	0.029	0.124***	−0.058	−0.021	1.000
BKCONC	0.028	−0.092**	0.102***	−0.040	0.002	−0.010	0.004	0.010	1.000
FINFREE	0.064*	0.194***	0.056*	0.001	0.037	0.122***	−0.095**	0.077**	−0.096**	1.000
RULEOFLAW	0.155***	0.423***	0.181***	0.027	−0.072**	−0.007	0.002	0.005	0.041	0.408***	1.000

This table presents the coefficients of the pairwise correlation between the variables described in Table 3.1. ***, ** and * denote statistical significance at the 1%, 5% and 10% level, respectively.

Table 3. The impact of financial inclusion on financial stability

	(1)	(2)	(3)	(1)	(2)	(3)
Dependent Variable: Z-SCORE	Fixed Effects	Fixed Effects	Fixed Effects	Random Effects	Random Effects	Random Effects
ACCOUNT	0.001	0.009***	0.010***	0.002	0.012***	0.012***
	(0.004)	(0.003)	(0.003)	(0.003)	(0.003)	(0.002)
GDPPERK		−0.079***	−0.088***		−0.052**	−0.054**
		(0.023)	(0.022)		(0.024)	(0.027)
BUSCYCLE		0.002*	0.002**		0.001	0.001
		(0.001)	(0.001)		(0.001)	(0.001)
INFLATION		0.004	0.005*		0.004*	0.005**
		(0.002)	(0.003)		(0.002)	(0.003)
RIR		0.002	0.002		0.002	0.002
		(0.002)	(0.002)		(0.002)	(0.002)
BROADMON		0.005	0.004		0.005	0.004
		(0.004)	(0.005)		(0.006)	(0.007)
CRISDUM		0.057	0.046		0.034	0.019
		(0.068)	(0.074)		(0.066)	(0.069)
BKCONC			−0.002			−0.001
			(0.001)			(0.001)
FINFREE			0.002			0.001
			(0.002)			(0.002)
RULEOFLAW			0.088			0.088
			(0.086)			(0.088)
CONSTANT	2.679***	2.471***	2.577***	2.641***	2.300***	2.380***
	(0.102)	(0.139)	(0.177)	(0.102)	(0.156)	(0.203)
Year dummies	YES	YES	YES	YES	YES	YES
R^2	0.057	0.321	0.360	0.095	0.334	0.360
Observations	754	365	337	754	365	337
Number of countries	43	24	24	43	24	24

This table reports the estimated coefficients derived from the baseline specification. The dependent variable used as a proxy for financial stability is the natural logarithmic of the «bank Z-score +1» (Z-SCORE) which captures the probability of default of banks. We measure financial inclusion by using the percentage of people having an account at a formal financial institution (ACCOUNT). GDP per capita (GDPPRK) is the gross domestic product divided by the midyear population. BUSCYCLE is the Hodrick-Prescott filtered real GDP growth rate. Inflation (INFLATION) is measured by the percentage change in the consumer price index (CPI). The lending rate adjusted for inflation is used to proxy for the real interest rate (RIR), while Bank concentration (BKCONC) measures the market structure represented by the assets of the five largest banks as a share of total assets. Financial freedom (FINFREE) is the measure of financial liberalization, largely the independence of financial institutions from government control and intervention, while the ratio of broad money to GDP (BROADMON) is used to proxy for money supply. CRISIS is a dummy (equal to zero for the years 2007–2008 and 0 otherwise) that captures the effect of the subprime crisis. Finally, RULEOFLAW is defined as the extent to which agents abide by the rules of the society. All regressions are estimated by using fixed effects estimator for panel data with country and year fixed effects. We also show results from a random effects estimation. Robust standard errors are in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 4. Robustness check: alternative measures of financial inclusion

Dependent variable: Z-SCORE	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)
	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects
LOAN	0.010	0.014**	0.015*
	(0.009)	(0.006)	(0.007)
SAVED				0.009	0.015*	0.014*
				(0.007)	(0.008)	(0.008)
FI							0.036	0.051**	0.055**
							(0.027)	(0.020)	(0.023)
GDPPERK		−0.064***	−0.072***		−0.035**	−0.017		−0.042**	−0.046***
		(0.021)	(0.018)		(0.013)	(0.020)		(0.017)	(0.015)
BUSCYCLE		0.001	0.001*		0.001	−0.000		0.001	0.001
		(0.001)	(0.001)		(0.001)	(0.001)		(0.001)	(0.001)
INFLATION		0.004	0.005		0.004	0.004		0.003	0.004
		(0.002)	(0.003)		(0.002)	(0.003)		(0.003)	(0.003)
RIR		0.001	0.002		0.002	0.003		0.002	0.002
		(0.002)	(0.002)		(0.001)	(0.002)		(0.002)	(0.002)
BROADMON		0.004	0.003		0.007*	0.008		0.005	0.004
		(0.004	(0.005)		(0.004)	(0.005)		(0.004)	(0.005)
CRISDUM		0.050	0.041		−0.076*	−0.059		−0.078	−0.096
		(0.069)	(0.073)		(0.039)	(0.038)		(0.054)	(0.057)
BKCONC			−0.001			−0.001			−0.001
			(0.001)			(0.002)			(0.002)
FINFREE			0.002			−0.000			0.002
			(0.001)			(0.002)			(0.002)
RULEOFLAW			0.097			0.045			0.083
			(0.089)			(0.123)			(0.100)
CONSTANT	2.649***	2.630***	2.701***	2.623***	2.569***	2.636***	2.752***	2.769***	2.855***
	(0.0661)	(0.130)	(0.165)	(0.0846)	(0.147)	(0.224)	(0.0218)	(0.0954)	(0.162)
Year dummies	YES	YES	YES	YES	YES	YES	YES	YES	YES
R^2	0.062	0.295	0.338	0.038	0.235	0.182	0.057	0.256	0.288
Observations	754	365	337	754	365	337	754	365	337
Number of countries	43	24	24	43	24	24	43	24	24

This table reports the results of the impact of financial inclusion on financial stability, when using alternative measures of financial inclusion namely the percentage of individuals older than 15, having borrowed money from a financial institution (LOAN) and the percentage of individuals older than 15, having saved money in their account (SAVED) and a composite index of financial inclusion denoted «FI» obtained from Principal Component Analysis (PCA). We still add covariates gradually as in our baseline results. All regressions are estimated by using fixed effects estimator for panel data with country and year fixed effects. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 5. Robustness check: An alternative measure of financial stability

	NPL (1)	NPL (2)	NPL (3)	CAR (1)	CAR (2)	CAR(3)
VARIABLES	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects	Fixed Effects
ACCOUNT	0.0225	−0.170	−0.205**	0.007*	0.009*	0.010**
	(0.098)	(0.117)	(0.097)	(0.004)	(0.005)	(0.004)
GDPPERK		2.895*	0.727		0.020	0.086
		(1.618)	(1.019)		(0.077)	(0.082)
BUSCYCLE		−0.278**	0.164		0.002	−0.013
		(0.119)	(0.129)		(0.007)	(0.011)
INFLATION		0.052	0.031		−0.001	−0.003
		(0.090)	(0.112)		(0.010)	(0.010)
RIR		−0.00869	0.00132		0.001	0.001
		(0.0849)	(0.105)		(0.004)	(0.004)
BROADMON		−0.548	−0.500		0.014	0.009
		(0.364)	(0.358)		(0.012)	(0.013)
CRISDUM		−0.930	−0.774		0.018	0.005
		(2.117)	(2.058)		(0.220)	(0.221)
BKCONC			0.147**			−0.007**
			(0.0529)			(0.003)
FINFREE			−0.0312			0.005
			(0.0865)			(0.003)
RULEOFLAW			−10.61***			0.309**
			(3.303)			(0.108)
CONSTANT	9.189***	7.864	2.612	2.111***	1.889***	2.068***
	(3.257)	(6.333)	(7.271)	(0.138)	(0.208)	(0.295)
Year dummies	YES	YES	YES	YES	YES	YES
R-squared	0.134	0.258	0.441	0.063	0.077	0.212
Observations	420	219	201	405	219	202
Number of countries	32	18	17	32	19	17

This table reports the results of the impact of financial inclusion on financial stability, when using two alternative measures of financial stability or soundness namely the ratio of non-performing loans to total loans (NPL) and the capital to assets ratio (CAR). We control for the full set of covariates included in the baseline model. All regressions are estimated by using fixed effects estimator for panel data with country and year fixed effects. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 6. Robustness check: an alternative econometric methodology

Dependent variable:	(1)	(2)	(3)
Z-SCORE	GMM	GMM	GMM
L. Z-SCORE	0.766***	0.735***	0.703***
	(0.254)	(0.117)	(0.121)
ACCOUNT	0.002	0.005***	0.005***
	(0.003)	(0.002)	(0.002)
GDPPERK		−0.009	−0.020
		(0.013)	(0.012)
BUSCYCLE		−0.001*	−0.001
		(0.001)	(0.001)
INFLATION		0.002	0.002
		(0.001)	(0.001)
RIR		0.001	0.002
		(0.001)	(0.001)
BROADMON		−0.002	−0.001
		(0.003)	(0.004)
BKCONC			−0.002
			(0.002)
FINFREE			0.002**
			(0.001)
RULEOFLAW			0.042
AR(1) p-value	0.016	0.007	0.011
AR(1) p-value	0.248	0.655	0.697
Hansen OID p-value	0.235	0.218	1.000
Observations	410	240	236
Number of countries	36	21	20

This table reports the results of the impact of financial inclusion on financial stability, when using an alternative econometric methodology: the Generalized Method of Moments (GMM) after having included one year lag of the dependent variable as a new regressor (Z-SCORE) to transform the model into a dynamic one. We control for the full set of covariates included in the baseline model. All regressions are estimated by the first difference GMM estimator. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 7. Robustness check: adding macroprudential policy as an additional control

Dependent variable: Z-SCORE	(1)	(2)	(3)
	Fixed Effects	Fixed Effects	Fixed Effects
ACCOUNT	0.005	0.012***	0.013***
	(0.005)	(0.003)	(0.003)
MAPP	−0.026	−0.014	−0.016
	(0.020)	(0.016)	(0.017)
GDPPERK		−0.114***	−0.127***
		(0.032)	(0.029)
BUSCYCLE		0.005*	0.007*
		(0.003)	(0.003)
INFLATION		0.003	0.005
		(0.003)	(0.003)
RIR		0.001	0.001
		(0.002)	(0.003)
BROADMON		0.002	0.001
		(0.006)	(0.007)
CRISDUM			0.063
			(0.082)
BKCONC			−0.000
			(0.002)
FINFREE			0.001
			(0.001)
RULEOFLAW			0.002
			(0.118)
CONSTANT	2.547***	2.420***	2.374***
	(0.136)	(0.172)	(0.237)
Year dummies	YES	YES	YES
R-squared	0.072	0.335	0.361
Observations	423	222	202
Number of countries	27	15	15

This table reports the results when considering macroprudential policy (MAPP) as an additional covariate. We control for the full set of covariates included in the baseline model. All regressions are estimated by the first difference GMM estimator. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 8. Robustness check: ruling out CFA countries

	(1)	(2)	(3)
VARIABLES	Fixed Effects	Fixed Effects	Fixed Effects
ACCOUNT	0.005*	0.009***	0.010***
	(0.003)	(0.003)	(0.003)
GDPPERK		−0.079***	−0.088***
		(0.023)	(0.022)
BUSCYCLE		0.002*	0.002**
		(0.001)	(0.001)
INFLATION		0.004	0.005*
		(0.002)	(0.003)
RIR		0.002	0.002
		(0.002)	(0.002)
BROADMON		0.005	0.004
		(0.004)	(0.005)
CRISDUM			0.046
			(0.074)
BKCONC			−0.002
			(0.001)
FINFREE			0.002
			(0.002)
RULEOFLAW			0.088
			(0.086)
CONTANT	2.585***	2.471***	2.577***
	(0.115)	(0.139)	(0.177)
Year dummies	YES	YES	YES
R-squared	0.128	0.321	0.360
Observations	573	365	337
Number of countries	33	24	24

This table reports our results when ruling out non CFA countries from our sample. We also control for all other variables included in the baseline model. All regressions are estimated by using fixed effects estimator for panel data with country and year fixed effects. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 9. The effect of different levels of inequality on the nexus financial inclusion-financial stability

		Panel (I)			Panel (II)
VARIABLES	High Inequality	High Inequality	High Inequality	Low Inequality	Low Inequality	Low Inequality
ACCOUNT	0.005	0.006**	0.006**	0.008	0.056	0.050
	(0.003)	(0.002)	(0.003)	(0.010)	(0.028)	(0.042)
GDPPERK		−0.069***	−0.074***		−0.178	−0.204
		(0.016)	(0.014)		(0.114)	(0.188)
BUSCYCLE		0.001**	0.001*		0.008	0.008
		(0.000)	(0.000)		(0.005)	(0.004)
INFLATION		−0.001	−0.003		0.008	0.004
		(0.004)	(0.003)		(0.008)	(0.007)
RIR		0.003	0.003		0.000	0.000
		(0.002)	(0.002)		(0.003)	(0.004)
BKCONC		−0.000	−0.004		0.005	0.003
		(0.005)	(0.005)		(0.026)	(0.030)
FINFREE		0.075	−0.076		0.124	0.233
		(0.106)	(0.063)		(0.212)	(0.511)
BROADMON			−0.001			0.002
			(0.003)			(0.005)
CRISDUM			0.000			0.006**
			(0.003)			(0.002)
RULEOFLAW			0.0521			0.248
			(0.091)			(0.437)
CONSTANT	2.246***	2.310***	2.606***	2.497***	1.193	1.106
	(0.149)	(0.160)	(0.268)	(0.260)	(0.932)	(2.178)
Year dummies	YES	YES	YES	YES	YES	YES
R-squared	0.106	0.305	0.338	0.098	0.393	0.490
Observations	307	287	193	188	79	72
Number of countries	34	19	19	21	11	11

This table reports the impact of financial inclusion on financial stability in countries with different levels of inequality. In panel (I), we use only the sub-sample countries experiencing high levels of income inequality and use the sub-sample of countries with lower levels of inequality in Panel (II). The variables are still added progressively into the regressions. All regressions are estimated by using fixed effects estimator for panel data with country and year fixed effects. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 10. The effect of political stability on the nexus financial inclusion-financial stability

		Panel (I)			Panel (II)
VARIABLES	High Stability	High Stability	High Stability	Low Stability	Low Stability	Low Stability
ACCOUNT	0.000	0.010***	0.010***	0.002	0.006	0.004
	(0.004)	(0.003)	(0.003)	(0.006)	(0.006)	(0.004)
GDPPERK		−0.143***	−0.158***		−0.038	−0.047**
		(0.028)	(0.032)		(0.028)	(0.021)
BUSCYCLE		0.008***	0.008***		0.001	0.001
		(0.003)	(0.003)		(0.001)	(0.001)
INFLATION		−0.001	−0.003		0.011**	0.012**
		(0.001)	(0.002)		(0.004)	(0.004)
RIR		−0.001	−0.001		0.005***	0.005**
		(0.001)	(0.001)		(0.002)	(0.002)
BKCONC		0.008	0.002		0.006	0.005
		(0.009)	(0.009)		(0.006)	(0.007)
FINFREE		−0.053	−0.070		0.146	0.162
		(0.079)	(0.085)		(0.115)	(0.131)
BROADMON			−0.002			−0.004
			(0.002)			(0.003)
CRISDUM			0.003			0.004**
			(0.002)			(0.002)
RULEOFLAW			−0.036			−0.036
			(0.093)			(0.202)
CONSTANT	2.757***	2.784***	2.826***	2.601***	2.278***	2.428***
	(0.114)	(0.109)	(0.193)	(0.181)	(0.216)	(0.300)
Year dummies	YES	YES	YES	YES	YES	YES
R-squared	0.073	0.496	0.515	0.070	0.384	0.449
Observations	476	212	193	270	152	143
Number of countries	43	20	17	29	16	16

This table reports the impact of financial inclusion on financial stability in countries with different levels of political stability. In panel (I), we use only the sub-sample countries experiencing high levels of political stability and use the sub-sample of countries with lower levels of political stability in Panel (II). The variables are still added progressively into the regressions. All regressions are estimated by using fixed effects estimator for panel data with country and year fixed effects. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table 11. The effect of financial openness on the nexus financial inclusion-financial stability

		Panel (I)			Panel (II)
VARIABLES	High financial openness	High financial openness	High financial openness	High financial openness	Low financial openness	Low financial openness
ACCOUNT	−0.004	0.010***	0.010***	0.001	0.010**	0.005
	(0.005)	(0.003)	(0.00252)	(0.007)	(0.005)	(0.004)
GDPPERK		−0.138***	−0.143***		−0.002	−0.018
		(0.020)	(0.025)		(0.016)	(0.015)
BUSCYCLE		0.009**	0.011***		−0.000	0.000
		(0.003)	(0.003)		(0.001)	(0.001)
INFLATION		−0.001	−0.002		0.013**	0.016***
		(0.002)	(0.002)		(0.005)	(0.003)
RIR		−0.002	−0.002***		0.004	0.006**
		(0.001)	(0.001)		(0.003)	(0.002)
BROADMON		−0.001	−0.004		0.007	0.005
		(0.009)	(0.010)		(0.011)	(0.011)
CRISDUM		−0.036	−0.065		0.007	0.003
		(0.088)	(0.089)		(0.146)	(0.141)
BKCONC			−0.001			−0.002
			(0.001)			(0.005)
FINFREE			−0.002			0.002
			(0.002)			(0.006)
RULEOFLAW			0.111			0.170
			(0.073)			(0.196)
Constant	2.789***	2.732***	3.058***	2.634***	2.079***	2.488***
	(0.157)	(0.132)	(0.235)	(0.202)	(0.136)	(0.437)
Year dummies	YES	YES	YES	YES	YES	YES
R-squared	0.096	0.503	0.547	0.099	0.618	0.672
Observations	427	185	166	181	106	97
Number of countries	43	18	17	28	15	15

This table reports the impact of financial inclusion on financial stability in countries with different levels of financial openness. In panel (I), we use only the sub-sample of countries that liberalize their financial sector more and use the sub-sample of countries that liberalize their financial sector less in Panel (II). The variables are still added progressively into the regressions. All regressions are estimated by using fixed effects estimator for panel data with country and year fixed effects. Robust standard errors in parentheses. ***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

Table A1. KMO test for financial inclusion index (fi) derived from the Principal Component Analysis (PCA). *** significance level of 1%

Determinant of correlation matrix	0.000
Chi2	1963.058***
KMO	0.669

Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The worldwide governance indicators: Methodology and analytical issues. In Policy research working paper series (pp. 5430). The World Bank. https://ssrn.com/abstract=1682130

 Google Scholar