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Financial Inclusion and Financial Stability : Current Policy Issues

Author

Listed:
  • Alfred Hannig

    (Asian Development Bank Institute)

  • Stefan Jansen

Abstract

The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters and national regulators response has been a global concerted effort to overhaul and tighten financial regulations. However, at a time of designing stricter regulations, it is crucial to avoid a backlash against financial inclusion. In this chapter, we argue that greater financial inclusion presents opportunities to enhance financial stability. Our arguments are based on the following insights : Financial inclusion poses risks at the institutional level, but these are hardly systemic in nature. Evidence suggests that low-income savers and borrowers tend to maintain solid financial behavior throughout financial crises, keeping deposits in a safe place and paying back their loans. Institutional risk profiles at the bottom end of the financial market are characterized by large numbers of vulnerable clients who own limited balances and transact small volumes. Although this profile may raise some concerns regarding reputational risks for the central bank and consumer protection, in terms of financial instability, the risk posed by inclusive policies is negligible. In addition, risks prevalent at the institutional level are manageable with known prudential tools and more effective customer protection. The potential costs of financial inclusion are compensated for by important dynamic benefits that enhance financial stability over time through a deeper and more diversified financial system. In the following pages, we present the current state of financial inclusion globally. We also explore some trends in financial inclusion and what the most effective policies are to favor it. In doing so, we suggest that innovations aimed at countering financial exclusion may help strengthen financial systems rather than weakening them.

Suggested Citation

  • Alfred Hannig & Stefan Jansen, 2010. "Financial Inclusion and Financial Stability : Current Policy Issues," Finance Working Papers 23124, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:23124
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:ilo:ilowps:487892 is not listed on IDEAS
    2. Robert Cull & Asl? Demirgüç-Kunt & Timothy Lyman, 2012. "Financial Inclusion and Stability : What Does Research Show?," World Bank Other Operational Studies 9443, The World Bank.
    3. Bhattacharyya, Nikhilesh., 2012. "Monetary policy and employment in developing Asia," ILO Working Papers 994685223402676, International Labour Organization.
    4. Han, Rui & Melecky, Martin, 2017. "Broader use of saving products among people can make deposit funding of the banking system more resilient," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 89-102.
    5. Bilkis Sultana & Mahbubar Rahman Khan, 2017. "Are Mobile Financial Services Promoting Financial Inclusion in Bangladesh? An Assessment Study," Working Papers id:11914, eSocialSciences.
    6. Agyekum, Francis & Locke, Stuart & Hewa-Wellalage, Nirosha, 2016. "Financial Inclusion and Digital Financial Services: Empirical evidence from Ghana," MPRA Paper 82885, University Library of Munich, Germany, revised 15 May 2017.
    7. Yoshino, Naoyuki & Morgan, Peter J., 2016. "Overview of Financial Inclusion, Regulation, and Education," ADBI Working Papers 591, Asian Development Bank Institute.
    8. M J Roa Garcia, 2016. "Can financial inclusion and financial stability go hand in hand?," Economic Issues Journal Articles, Economic Issues, vol. 21(2), pages 81-103, September.
    9. Khou, Vouthy. & Cheng, Oudom. & Leng, Soklong. & Meng, Channarith., 2015. "Role of the Central Bank in supporting economic diversification and productive employment in Cambodia," ILO Working Papers 994878923402676, International Labour Organization.
    10. repec:ilo:ilowps:468522 is not listed on IDEAS
    11. Llanto, Gilberto M. & Rosellon, Maureen Ane D., 2017. "What Determines Financial Inclusion in the Philippines? Evidence from a National Baseline Survey," Discussion Papers DP 2017-38, Philippine Institute for Development Studies.
    12. International Monetary Fund, 2014. "Namibia; Selected Issues," IMF Staff Country Reports 14/41, International Monetary Fund.
    13. Penelope Hawkins, 2011. "Financial access: what has the crisis changed?," BIS Papers chapters,in: Bank for International Settlements (ed.), Central banking in Africa: prospects in a changing world, volume 56, pages 11-20 Bank for International Settlements.
    14. Maria Luisa Jaramillo Gomez & Alvaro Turriago Hoyos & Ulf Thoene, 2015. "Financial inclusion from the perspective of social innovation: The case of Colombia," Proceedings of Business and Management Conferences 3104801, International Institute of Social and Economic Sciences.
    15. repec:jfr:ijfr11:v:9:y:2018:i:1:p:203-218 is not listed on IDEAS
    16. Ozili, Peterson Kitakogelu, 2018. "Impact of Digital Finance on Financial Inclusion and Stability," MPRA Paper 84771, University Library of Munich, Germany.

    More about this item

    Keywords

    finance; financial inclusion; financial systems;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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