Does Financial Inclusion Affect Financial Stability In Low-income Countries?

Abstract

Inclusive financial system, a breakthrough on the way of exploiting the potentiality and opportunities of an economy which is considered as a prerequisite for Sustainable Development Goals (SDGs) around the globe, especially in the low-income economies apart from their economic and financial development. This scenario raises a question, whether financial inclusion ensures or degrades financial stability in low-income economies. A number of studies have been performed on this issue and have suggested both positive and negative ways in which financial inclusion could affect financial stability. But most of those studies were based on abroad sample of countries, including many high-income economies. This paper contributes to the existing literature on this subject by estimating the effect of financial inclusion on financial stability, especially on low-income economies. After analyzing the causal relationship, this paper finds that ensuring financial inclusion by greater ‘usage’ and ‘access’ of financial system contributes positively to the financial stability in low-income economies by reducing the NPL ratio and increased gross interest margin, even though it might cost with lower return on assets, increased non-interest expenses to maintain the additional credit expansion, and permitting some under-standard loans leading to disturbances in financial markets which are nominal in comparison with the benefit of fueling the productive sectors of the low-income economies. These findings suggest that policy measures to increase financial inclusion by ensuring easy access and greater usage would facilitate the financial stability in low-income economies.