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Financial Inclusion and Financial Stability: Current Policy Issues

  • Hannig, Alfred

    (Asian Development Bank Institute)

  • Jansen, Stefan

    (Asian Development Bank Institute)

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    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.

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    File URL: http://www.adbi.org/files/2010.12.21.wp259.financial.inclusion.stability.policy.issues.pdf
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    Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 259.

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    Length: 33 pages
    Date of creation: 21 Dec 2010
    Date of revision:
    Handle: RePEc:ris:adbiwp:0259
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    1. Pascaline Dupas & Jonathan Robinson, 2009. "Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya," NBER Working Papers 14693, National Bureau of Economic Research, Inc.
    2. Patrick Honohan, 2004. "Financial development, growth, and poverty: how close are the links?," Policy Research Working Paper Series 3203, The World Bank.
    3. Beck, Thorsten & de la Torre, Augusto, 2006. "The basic analytics of access to financial services," Policy Research Working Paper Series 4026, The World Bank.
    4. Gine, Xavier & Townsend, Robert M., 2003. "Evaluation of financial liberalization : a general equilibrium model with constrained occupation choice," Policy Research Working Paper Series 3014, The World Bank.
    5. repec:ner:tilbur:urn:nbn:nl:ui:12-3508393 is not listed on IDEAS
    6. de la Torre, Augusto & Gozzi, Juan Carlos & Schmukler, Sergio L., 2007. "Innovative experiences in access to finance : market friendly roles for the visible hand ?," Policy Research Working Paper Series 4326, The World Bank.
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