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Financial Stability and Financial Inclusion

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  • Peter J. Morgan

    (Asian Development Bank Institute (ADBI))

  • Victor Pontines

Abstract

Developing economies are seeking to promote financial inclusion, i.e., greater access to financial services for low-income households and firms, as part of their overall strategies for economic and financial development. This raises the question of whether financial stability and financial inclusion are, broadly speaking, substitutes or complements. In other words, does the move toward greater financial inclusion tend to increase or decrease financial stability? A number of studies have suggested both positive and negative ways in which financial inclusion could affect financial stability, but very few empirical studies have been made of their relationship. This partly reflects the scarcity and relative newness of data on financial inclusion. This study contributes to the literature on this subject by estimating the effects of various measures of financial inclusion (together with some control variables) on some measures of financial stability, including bank non-performing loans and bank Z-scores. We find some evidence that an increased share of lending to small and medium-sized enterprises (SMEs) aids financial stability, mainly by reducing non-performing loans (NPLs) and the probability of default by financial institutions. This suggests that policy measures to increase financial inclusion, at least by SMEs, would have the side-benefit of contributing to financial stability as well.

Suggested Citation

  • Peter J. Morgan & Victor Pontines, 2014. "Financial Stability and Financial Inclusion," Finance Working Papers 24278, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:24278
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
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    4. Eswar S. Prasad, 2010. "Financial Sector Regulation and Reforms in Emerging Markets: An Overview," NBER Working Papers 16428, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Aaron Mehrotra & James Yetman, 2015. "Financial inclusion - issues for central banks," BIS Quarterly Review, Bank for International Settlements, March.
    2. Byson Beracah Majanga, 2016. "The Journey to Financial Inclusion in Malawi- What Does the Future Hold?," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 2(9), pages 169-175, 09-2016.
    3. Morgan, Peter & Zhang, Yan, 2015. "ADBI WP543: Mortgage Lending and Financial Stability in Asia," ADBI Working Papers 543, Asian Development Bank Institute.
    4. Yoshino, Naoyuki & Morgan, Peter J., 2016. "Overview of Financial Inclusion, Regulation, and Education," ADBI Working Papers 591, Asian Development Bank Institute.
    5. 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.
    6. Khalily, M. A. Baqui, 2016. "Financial Inclusion, Financial Regulation, and Education in Bangladesh," ADBI Working Papers 621, Asian Development Bank Institute.

    More about this item

    Keywords

    Financial Stability; financial inclusion; SMEs; low-income households; non-performing loans;

    JEL classification:

    • 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
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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