Financial Inclusion and Stability : What Does Research Show?

Abstract

A growing body of research suggests that whether broad-based access to formal financial services promotes financial stability depends on how that access is managed within the regulatory and supervisory framework, especially in terms of financial integrity and consumer protection. Four factors come into play: financial inclusion, financial consumer protection, financial integrity, and financial stability. These factors are inter-related and, under the right conditions, positively related. Yet failings on one dimension are likely to lead to problems on others. This brief explores what research to date shows about the linkages and potential beneficial relationships among these factors, and it identifies gaps that remain to be explored. There is limited empirical work exploring the specific linkages between financial inclusion and financial stability. Studies have focused largely on the impact of financial development on growth, income inequality, and poverty reduction. The evidence strongly indicates that, when effectively regulated and supervised, financial development spurs economic growth, reduces income inequality, and helps lift households out of poverty.