A Linear Mixed Model Approach for Determining the Effect of Financial Inclusion on Bank Stability: Comparative Empirical Evidence for Islamic and Conventional Banks in Kuwait

Abstract

Recently, financial inclusion and bank stability have gained attention among researchers, particularly since the 2008 global financial crisis. This study investigates how financial inclusion may have influenced bank stability given differences in banks’ structure based on operating principles (Islamic and conventional banks) during the period of 2003–2017, using Kuwait as a high-income economy case. The current paper assesses how bank stability responds to financial inclusion. This work adopts a Linear Mixed Model (LMM), which tracks variables over time while considering other time-invariant variables. The findings show that the adopted measures of financial inclusion, access and depth, are both significant and negatively related to bank stability. Furthermore, the results unveil a slight difference between the response of Islamic and conventional banks’ stability to the dimensions of financial inclusion. Additionally, the study concludes that the financial crisis had an inverse and significant impact on bank stability. However, the extent of the impact appears to have been greater on Islamic banks compared to their conventional counterparts. Based on this study, banking with more financial inclusion can improve stability if institutional quality in Kuwait is improved so that these banks can operate more efficiently.