Does financial inclusion affect financial stability: Evidence from BRICS nations?

Abstract

Looking the global trends of financial crises, it is obscure to draw any conclusion that whether greater financial inclusion is a threat or a safeguard for financial stability. In order to demystify the relationship the present study aims to examine the impact of financial inclusion on financial stability among the BRICS countries over the period 2005 through 2015. In order to accomplish this study we gathered data from various international data sources. Taking six different indicators of financial availability, accessibility and usability, this paper construct a single financial inclusion index for BRICS countries through Principle Component Analysis (PCA) method. Furthermore to know the causality between financial inclusion and financial stability, this study uses the Dumitrescue and Hurlin (2012) panel granger causality test. Additionally, to know the impact of financial inclusion on financial stability the system Generalized Method of Moments (GMM) estimator has been applied. The empirical findings of this study depicts that financial inclusion has a negative and significant effect on financial stability. The major reasons of adverse effects of financial inclusion on financial stability is due to rapid expansion of credit to the private sectors, erosion of credit standards of the banks, difficulties in credit assessment, increase in non-performing assets, credit defaults of the borrowers, and inadequate supervision of the banking sector. With context to the control variables we have used inflation (INF) and GDP growth rate (GDPGR) as our control variables. The results of the control variables show that inflation has negative and significant effect on financial stability, whereas GDP growth rate has positive and significant effect on financial stability of the BRICS countries. Based on our empirical findings this study recommends the policymakers to take appropriate policy measures before implementing pro financial inclusive policies. The financial institutions are advised to strength their banking efficiency to supervise the credit standard and to improve the credit assessment procedure and to provide credit to its customers based on their strict vigilance. The countries are advised to adopt stringent lawsuit and legal procedures for credit default of the borrowers.