Financial inclusion, competition and financial stability: New evidence from developing economies

Abstract

This study utilizes cross-country data from 2002 to 2019 from 60 selected developing countries to explore the impact of competition and financial inclusion on financial stability. Employing the system GMM estimator, compelling evidence is revealed, highlighting a number of key findings. Firstly, it is observed that financial inclusion has a weakening effect on financial stability within developing countries. Conversely, competition among these nations demonstrates a significant capacity to bolster financial stability. Additionally, the study underscores the pivotal role of financial development, identifying it as a primary driver that enables financial inclusion to positively influence financial stability within developing nations. Furthermore, the introduction of the square term of financial inclusion yields noteworthy insights, revealing a nonlinear relationship. Specifically, the findings suggest that strategic investments in the financial inclusion of developing countries have the potential to enhance financial stability up to a certain threshold. Therefore, for emerging economies seeking to fortify their financial stability, prioritizing efforts to augment financial inclusion is imperative. Over the long term, such endeavors have the potential to yield tangible improvements in financial stability.In conclusion, the research offers valuable policy implications. These include recommendations aimed at fostering greater financial inclusion within developing economies as a means of bolstering overall financial stability. By heeding these suggestions and implementing targeted policies, policymakers can work towards cultivating a more resilient and robust financial landscape within their respective nations.