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Financial inclusion and Microfinance stability

Financial inclusion is where individuals and businesses have access to useful and affordable financial products and services that meet their needs that are delivered responsibly and sustainably. Financial inclusion is defined as the availability and equality of opportunities to access financial services.

Those that promote financial inclusion argue that financial services can be viewed as having significant positive externalities when more people and firms participate.

The term “financial inclusion” has gained importance since the early 2000s, a result of identifying financial exclusion and it is a direct correlation to poverty according to the World Bank. The United Nations defines the goals of financial inclusion as follows:

  • Access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance.
  • Sound and safe institutions governed by clear regulation and industry performance standards.
  • Financial and institutional sustainability, to ensure continuity and certainty of investment.
  • Competition to ensure choice and affordability for clients.

Financial inclusion and bank stability

The theoretical and empirical evidences on the link between financial inclusion and bank stability are limited. Banking literature indicates several potential channels through which financial inclusion may influence bank stability. A recent study appeared in Journal Economic Behaviour & Organization. a robust positive association between financial inclusion and bank stability. The authors show that the positive association is more pronounced with those banks that have higher retail deposit funding share and lower marginal costs of providing banking services; and also, with those that operate in countries with stronger institutional quality.

Evidence on the effectiveness of financial inclusion interventions

A systematic review of reviews by the Campbell Collaboration in 2019 assessed the available evidence on the effectiveness of financial inclusion programs to improve economic, social, behavioural and gender-related outcomes in low- and middle-income countries. They found that results from research have been mixed and programs to improve access to financial services often have small or inconsistent effects on income, health, and other social outcomes. The review showed that programs geared toward savings opportunities had small but more consistently positive effects, and fewer risks, than credit-oriented programs.

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