Can financial inclusion and financial stability go hand in hand?

Abstract

This study addresses the relation between financial inclusion and financial stability. In order to do so, we review studies on the diverse possible links between these two financial phenomena for developing countries. Although some results are still preliminary, from the reviewed studies we can draw some conclusions. First, risk may rise from rapid credit growth associated with new financial inclusion institutions and instruments, and from unregulated parts of the financial system. However, broader access to deposits that leads to a more diversified base of deposits, could improve significantly the resilience of the overall financial system and thus financial stability. A further conclusion is that it is important to specify what type of state intervention or regulation is necessary in the particular case of financial inclusion. The application of standards and other measures that guarantee financial stability might prove to be a setback to inclusion processes.