Reflecting on the Recent Banking Crisis, What Are the New Financial Stability Determinants?

Financial stability is a crucial indicator of the financial sector's health, reflecting the system's resilience or vulnerability to crises. This study investigates the impact of macroeconomic variables and financial inclusion on financial stability in Indonesia, utilizing quarterly data from the first quarter of 2012 to the fourth quarter of 2021. Employing the Vector Error Correction Model (VECM), the research examines the influences of these factors in both the short and long term. The findings reveal that macroeconomic variables and financial inclusion significantly affect financial stability in Indonesia across both time frames. Specifically, inflation emerges as a critical factor influencing financial stability in the long term, while interest rates play a pivotal role in the short term. Moreover, financial inclusion, represented by the public's use of banking products and third-party funds relative to Gross Domestic Product (GDP), impacts financial stability both in the long and short term. Conversely, financial inclusion, measured by credit to GDP, exhibits only short-term effects on financial stability. The results underscore the importance of careful consideration by the central bank when formulating monetary policy, particularly regarding interest rate adjustments, due to their immediate impact on financial system stability. Over the long term, maintaining control over inflation rates is imperative to safeguard financial stability. Furthermore, financial institutions, in their role of fostering financial inclusion by distributing credit, must balance the quality of credit with its quantity to avoid negative impacts on the financial system's stability. This study contributes valuable insights for policymakers and financial institutions aiming to bolster Indonesia's financial stability through prudent macroeconomic management and the strategic implementation of financial inclusion initiatives.

International policymakers prioritize financial stability and inclusion, but often view them as separate goals, overlooking potential overlap and trade-offs. If synergies and trade-offs between the two concepts are not recognized and understood, policy design may yield less-than-ideal results. This paper provides a systematic review of the theoretical literature on financial inclusion and financial stability as well as empirical research initiatives examining the relationship between the two concepts. We found that current studies do not always present a unified theoretical approach or conceptual framework to explain the channels of the relationship between financial inclusion and stability. Empirical studies to date offer divergent views on the financial inclusion and stability nexus. While some studies are inconclusive, some also suggest that financial inclusion has a positive and significant impact on financial stability, as explained by the institutional theory. While other studies, supported by the aggressive credit expansion theory, reveal that financial inclusion can have a negative influence on financial stability. Through this comprehensive review, we intend to improve awareness and cohesion among scholars and policy makers of financial inclusion and financial stability while also facilitating the development of solid foundations to address future research and policy making challenges.

PurposeThe purposes of the paper are as follows: (1) Analysing the effect of financial inclusion on financial stability. (2) Examining whether financial inclusion non-linearily impacts financial stability. (3) Analysing whether the effect of financial inclusion varies across quantiles of financial stability. (4) Investigating whether dimensions of financial inclusion affect financial stability differently. (5) Examining whether the effect of financial inclusion on financial stability depends on competitiveness of the banking industry.Design/methodology/approachUsing panel data for 19 African countries for the period 2006–2022, we first developed multidimensional index of financial inclusion using two-stage indexing approach. Then employing panel semiparametric regression, we analyse the non-linear nexus between financial stability and financial inclusion. We further employ panel quantile regression to investigate the differential effect of financial inclusion at different quantiles of financial stability. We also employed two-stage least squires, and alternative measurement of financial stability as robustness checks.FindingsEmploying panel semiparametric regression, we demonstrate that the financial inclusion-stability nexus exhibits non-linearity: below (above) threshold level financial inclusion promotes (reduces) financial stability. Employing panel quantile regression, we find that the effect of financial inclusion increases at higher quantiles of financial stability. We further demonstrate that the effect of financial inclusion on financial stability is pronounced in a more competitive bank industry. The findings are robust to two-stage least squares estimation, and alternative measurement of financial stability. The results suggest that keeping a balance between achieving stable and inclusive financial system, and ensuring a competitive banking industry are essential to achieve bank soundness while promoting financial inclusion.Originality/valueThe study incrementally contributes to the literature related to the financial inclusion – stability nexus in four-fold. First, unlike studies that relied on some indicators of financial inclusion, we employed the effect of multidimensional financial inclusion on financial stability and further examined whether or not the effect varies across financial inclusion dimensions. Second, unlike studies that assumed a linear nexus between financial inclusion and stability, employing panel semiparametric regression, we investigated for non-linear relationship between the two. Employing a novel panel quantile estimation approach, we further scrutinised whether the effect of financial inclusion varies across quantiles of financial stability. Third, to our knowledge, our study is the first to examine the effect of multidimensional financial inclusion on bank soundness in Africa.HighlightsWe find a non-linear nexus between financial inclusion and financial stability.Financial inclusion below (above) threshold enhances (reduces) financial stability.The effect of financial inclusion is pronounced at higher quantiles of financial stability.The effect of financial inclusion on financial stability depends on bank competition.The results hold across different dimensions of financial inclusion.

PurposeThe study aims to find out the impact of financial inclusion and financial development on financial stability using panel data from eight countries in the Middle East and North Africa (MENA).Design/methodology/approachTo achieve the aim of the study, the researcher prepared two indicators of financial inclusion and governance to find out the impact of financial development on the relationship between financial inclusion and financial stability. Data on financial inclusion was obtained from the International Monetary Fund, data on financial development and financial stability were obtained from the World Bank.FindingsThe results of the fixed and random effect methods show that financial inclusion has a significant positive effect on financial stability. Additionally, financial development represents a moderating variable in the significant positive effect on the relationship between financial inclusion and stability in the MENA countries.Research limitations/implicationsThe current study suffers from some limitations that researchers must be aware of in future research. First, there is an inability to determine qualitative aspects such as time and cost when designing a composite indicator of financial inclusion. Second, due to limited data, we used only eight countries from the MENA. It is suggested to expand the sample to include other countries.Originality/valueThis paper contributes to the related literature between financial inclusion and financial stability by confirming or denying the results of previous studies. Also, to the best of the author’s knowledge, this paper is the only one that explains the role of financial development in the relationship between financial inclusion and stability in MENA countries, using a composite index to calculate financial inclusion. Finally, the study seeks to focus the attention of the government and policymakers to build a system of financial inclusion that leads to improving financial stability.

PurposeAsia is the largest and most densely inhabited region in the world. Despite exhibiting an extremely expeditious economic growth, the majority of the world population categorized as poor resides in Asia, with more than a billion people financially excluded. This study aims to assess how social sustainability (SS) may increase financial inclusion (FI) and maintain financial stability (FS) in Asia.Design/methodology/approachEstablished on the stakeholder theory, the study analyzed the association among SS, FI and FS in Asia, employing a generalized method of moment’s estimation. The mediation of FI was also investigated in the relationship between SS and FS. Moreover, this study has analyzed the alternative proxies for the variables of interest to ensure dynamic results.FindingsThe findings point toward a positive association among SS, FI and FS. Furthermore, FI is observed to be undertaking a partial mediating role between SS and FS.Practical implicationsThis study emphasizes that both SS and FI have individual parts in the amelioration of FS in Asia, whereas previous studies implied that FI is a mere tool for stimulating SS. Hence, Asian policymakers must keep these outcomes in mind due to their simultaneous contribution to FS.Originality/valueThe relationship between SS, FI and FS has received little attention in the literature. No previous study has deduced that increasing SS may instigate an increase in FI and FS. Additionally, quite contrary to previous studies that relied on narrow indicators, this study develops a broad measurement of SS by considering a wide range of crucial indicators for a sustainable society.

Purpose: Academics, policymakers, regulators and other stakeholders have expressed interest in the relationship between inclusive financial systems and financial stability so as to ensure sustainable development. However, results of prior studies on the interactions between financial inclusion and financial stability have yielded mixed results across countries and regions. Herein, we examined causality between financial inclusion and stability of the financial sector in twenty-four Sub-Saharan African (SSA) economies, using data spanning 2000 to 2019, to address gaps in the existing literature. Design/Methodology/Approach: We used a principal component analysis to develop a composite financial inclusion index. Thereafter, we evaluated the data’s stationarity properties using various unit root tests. Lastly, we applied ARDL to analyse the short and long-run cointegrating relationships between financial inclusion and financial stability, and confirmed causality of the two factors using Granger testing. Findings: This study established a significant long-run relationship and bidirectional causality between financial inclusion and financial stability, thus implying complementarity. Therefore, governments and oversight bodies should account for the synergy between an inclusive financial sector and financial stability when formulating financial and macroeconomic policies and regulations in the SSA countries. Implications/Originality/Value: We underscore the importance of financial market stability in fostering financial inclusion of all members of society, particularly during periods of crisis.

Purpose: The purpose of the present study is to analyze the effect of financial inclusion on sustainable economic growth for Indonesian banking companies, and to investigate the effect of financial inclusion on sustainable economic growth through financial system stability. Design/Methodology/Approach: This research is a quantitative study using secondary data taken from annual financial statements of banking companies listed on the Indonesia Stock Exchange (BEI) over the period 2010-2017. Findings: The results show that (a) the financial inclusion does not affect sustainable economic growth in Indonesian banking companies, and (b) the financial system stability mediates the effect of financial inclusion on sustainable economic growth in Indonesian banking companies. Practical Implications: This study provides deeper insight into the factors that drive financial inclusion and an increase in market share and financial performance of banks. With conditions of inclusion that are still low in Indonesia while the number of banks is increasing, it is necessary to have strong financial system stability. By understanding the matrix in financial inclusion, managers are well-positioned to understand the strategies needed to promote financial inclusion so that market share increases. Likewise, the results of the present study are probable to be an input for other stakeholders for their consideration in decision making. Originality/Value: Empirical research that explores the effects of financial inclusion, and sustainable economic growth in Indonesia is still very limited. According to our knowledge, no one has examined the use of financial system stability as mediation as it is used in this study.

Executive SummaryThe study examines the role of economic freedom in the relationship between financial inclusion and stability in sub‐Saharan African economies. By employing the System General Method of Moment and data from 39 sub‐Saharan African countries between 2004 and 2017, the study examines whether economic freedom (i.e., financial and business freedom) conditions the effect of financial inclusion on stability. Results from the study show evidence of a positive impact of financial inclusion on financial stability in sub‐Saharan African economies. Again, the results depict that financial inclusion could better enhance financial stability in economies with a high level of economic freedom (i.e., financial and business freedom). The results suggest that policymakers should allow financial institutions to operate with the level of freedom required to provide services at the lowest possible price. Further, it is recommended that policymakers should ensure that administrative requirements are minimal, bureaucracy costs are lesser, and licensing regulations for startups and expansion of existing firms are friendly. With this, associated increases in business and financial freedom would have promising implications for the relationship between financial inclusion and stability.Managerial Implications of the StudyThis research is very vital for firms in both the financial and nonfinancial. Specifically, managers of firms in the financial sector can embrace the level of financial freedom that would be allowed by the government, to come up with new and inclusive financial products, while putting in measures not to endanger the stability of the financial sector. Managers in the business sector could also take advantage of the business freedom that would be allowed by the government to diversify business operations, increase profitability and avoid causing nonperforming loan problems to banks.Originality/ValueThe study provides the first insight into how economic institutions condition the effect of financial inclusion on financial stability, which has not been previously studied.

This study investigates the relationship between financial inclusion and financial stability in Zimbabwe over the period 2000–2020, with an emphasis on broader implications for economic development and livelihoods. The objective is to assess how efforts to enhance financial inclusion influence the stability of the banking system, which is critical for sustainable economic growth and improving livelihoods, particularly in marginalised communities. Using the Fully Modified Ordinary Least Squares (FMOLS) cointegration technique, the study analysed time series data on financial inclusion, financial stability, domestic credit, gross domestic product (GDP), and the size of the financial sector. The findings indicate a significant negative relationship between financial inclusion and financial stability, suggesting that increased financial inclusion adversely impacts bank system stability. Similarly, domestic credit exhibited a negative and significant relationship with financial stability. However, GDP and financial sector size positively and significantly contributed to financial stability, reinforcing their role in supporting inclusive economic development. These results underscore the complexities of balancing financial inclusion and stability within Zimbabwe’s financial sector. The study concludes that while expanding financial inclusion is essential for promoting access to financial services and advancing economic development and livelihoods, it poses risks to financial stability if not accompanied by appropriate risk management and regulatory measures. Factors such as relaxed lending standards, insufficient oversight of microfinance institutions, and reputational risks associated with outsourcing credit functions can exacerbate these challenges. The study concludes that expanding financial inclusion without robust regulatory oversight and risk management poses significant risks to banking stability and recommends a balanced policy approach that integrates technological innovation with stronger institutional frameworks to foster sustainable and inclusive growth.

This paper investigates the impact of financial inclusion on financial stability in BRICS countries from 2004 to 2020. Using a panel smooth transition regression model, the results reveal a U-shaped relationship between financial inclusion and financial stability. Financial inclusion reduces financial stability up to a threshold of 44.7%. Beyond this point, financial inclusion contributes to greater financial stability, through gradual transitions. Enhanced financial inclusion supports banks in stabilizing their deposit funding by facilitating access to more stable, long-term funds and alleviating the negative impacts of fluctuations in returns. Furthermore, the study examines the role of institutional quality in shaping the financial inclusion-financial stability nexus, indicating a significant positive effect, especially in the upper regime. These findings provide valuable insights for financial regulatory authorities, highlighting the importance of promoting financial inclusion in BRICS economies and adapting regulations to mitigate potential risks to global financial stability.

PurposeThe main purpose of this paper is to examine the relationship between financial inclusion and financial stability in South Asian countries.Design/methodology/approachTo measure the financial inclusion, a multidimensional time-varying index is constructed following the Human Development Index method. The long-run relationship between financial inclusion and financial stability is examined by using the panel cointegration test, fully modified ordinary least squares and dynamic ordinary least squares approaches to show the long-run elasticity of explanatory variables on dependent variables. Further, Dumitrescu-Hurlin panel causality test is used to find the direction of causality between financial inclusion and financial stability. Data set is of annual frequency of seven countries for the period from 2004 to 2018.FindingsThe empirical findings of this study confirm that financial inclusion has a positive and statistically significant impact on financial stability. These results suggest that South Asian countries can attain long-run financial stability by improving the coverage of financial inclusion. Further, panel causality test shows a unidirectional causality from financial inclusion to financial stability.Research limitations/implicationsThe major limitation of the study is the availability of time series data for all important variables. Various socioeconomic variables can be used to measure financial stability, but this study included only the Z-score as the proxy for financial stability. Due to the data constraint, this study is unable to use the time series econometric analysis.Practical implicationsAs the study confirms that financial inclusion is one of the main drivers of financial stability, it is suggested that the policymakers should emphasize on financial sector reforms to enjoy financial stability in the long run, especially in developing countries. So governments and policymakers of study countries need to address the issues involved in access to financial services to increase financial stability. Furthermore, it is also important to remove limitations of access to formal financial services for marginalized sections of the society with proper supervisions.Originality/valueThis is a new contribution on the present topic. This study has constructed a new multidimensional financial inclusion index (FII) following the Human Development Index method for South Asian countries based on annual data and using ten indicators of formal financial services related to availability, accessibility and usage. To the best of the authors’ knowledge and information, this is the first study on South Asian countries to construct and apply the new multidimensional FII. Further, the study examines the long-run elasticity of financial inclusion on financial stability employing FMOLS and DOLS approach.

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.

Financial inclusion is one of strategy to increase inclusive growth in Asian countries. However, it may cause either stability or instability in the financial system. Therefore, this research aimed to analyze the relationship between financial inclusion and financial stability and to analyze factors that affect the stability of the financial system in seven Asian countries in the periode of 2007-2011. The methods used are Pearson correlation and Fixed Effect Model. The results show that there is negative correlation at 5% significant level between financial inclusion and financial stability. Factors that significantly affect the financial stability are financial inclusion, financial stability in the previous period, non-FDI capital flows to GDP, the ratio of current assets to deposits and Short-term funding, and GDP per capita. Thus the increase in financial inclusion, current assets of banking, GDP per capita, and the portfolio investment can become the strategies to improve the financial stability (Bank z score) on the determined and future year.

PurposeThis study aims to examine the effect of gender equality on financial stability and financial inclusion for 14 developing countries using yearly data from 2005 to 2021.Design/methodology/approachThe two-stage least squares regression estimation and the generalized linear model regression estimation were used to investigate the effect of gender equality on financial stability and financial inclusion.FindingsGender equality has a significant positive effect on financial stability and financial inclusion in developing countries. Gender equality has a significant positive effect on financial stability and financial inclusion in African countries. Gender equality has a significant positive effect on financial stability but not on financial inclusion in non-African countries.Originality/valueLittle attention has been paid to the role of gender equality in promoting financial stability and financial inclusion. The authors address this issue in this study.

The link between financial inclusion and financial stability is a central concern in public economic policymaking, particularly in emerging countries where access to financial services remains limited. While financial inclusion is widely regarded as a key driver of economic development, its impact on financial stability remains debated. Some studies highlight the stabilizing effect of financial inclusion, whereas others, like emphasize its potential risks. This study empirically investigates the relationship between financial inclusion and financial stability across the years 2011, 2014, 2017, and 2021 in 26 African and MENA countries. The hierarchical multiple regression (HMR) method is employed to assess the independent effect of financial inclusion, controlling for macroeconomic variables. The findings reveal that financial inclusion positively contributes to financial stability through channels such as digital payments and the number of bank branches. Conversely, savings, the number of ATMs, and the money supply exhibit a negative effect on financial stability. These results underscore the need for a regulatory framework that balances financial inclusion with financial stability. In particular, cybersecurity measures must be implemented to support the expansion of digital payments, and supervisory mechanisms should be reinforced to mitigate liquidity risks.