Does financial inclusion mitigate credit boom-bust cycles?

Abstract

Following up on claims that high and rising levels of financial inclusion might contribute to financial stability, we test whether level and progress in financial inclusion has an effect on the magnitude of a financial bust after a crisis. We do this for the global financial crisis and a sample of crisis episodes covering the period 2004–2017. We find some evidence that countries with more inclusive banking sectors show less pronounced credit busts in times of financial turbulence. However, higher borrower growth rates in the years preceding a crisis have no mitigating effect on the depth of the bust. Thus, it remains a policy challenge to expand financial inclusion without contributing a potentially destabilizing credit boom.