Abstract
This study aims to assess the effect of financial inclusion and competitiveness on banks’ financial stability, considering the moderating role of financial regulation. To do so, we compare the effects of these variables in Sub-Saharan African (SSA) and Latin American and Caribbean (LAC) countries. Our results suggest that inclusion enhances bank stability in SSA and LAC countries, and financial regulation contributes to increasing financial stability in LAC countries, while we find no statistical significance in the effect of financial regulation on financial stability in SSA countries. Moreover, competitiveness negatively impacts financial stability, and financial regulation moderates the negative effect of competitiveness on financial stability in SSA and LAC countries. We also find that financial inclusion reduces credit risk in SSA countries, and for LAC countries financial inclusion increases credit risk and reduces bank profitability. Regarding the practical implications, this study shows that fostering financial inclusion in the countries under study contributes significantly to improving the welfare of households and especially to the stability of the financial system. The present study allows expanding of the scarce literature by examining the effect of financial inclusion and market structure on financial stability in two different samples, consisting of 41 countries in the SSA region and 31 countries in the LAC region, throughout 2005–2018.
Highlights
Financial inclusion is an important component of financial development (Emara and Said 2021; Musau et al 2018; Zulkhibri 2016)
Policymakers in developing countries have privileged in their agendas measures that contribute to increased financial stability and financial development (Beck 2008; Emara and Said 2021; Zulkhibri 2016)
Any economy that aims to achieve financial development and inclusive economic growth must strike a balance between financial inclusion and stability, as a higher priority given to only one component can stifle the other (Musau et al 2018)
Summary
Financial inclusion is an important component of financial development (Emara and Said 2021; Musau et al 2018; Zulkhibri 2016). It plays a relevant role in reducing poverty and inequality through the easy and safe availability of financial products and services, such as savings, bank credit, insurance, and payments These provide great advantages in improving households’ living conditions when used rationally (Owen and Pereira 2018; Zins and Weill 2016). Financial inclusion is a strong manifestation of the interest of public authorities in reducing poverty and promoting inclusive economic growth through access to finance for all segments of society. Financial inclusion is an integral part of the four pillars of development support defined by the United Nations, which are summarized as: (1) formulating an employment-oriented growth strategy; (2) strength-
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