Has financial inclusion made the financial sector riskier?

Abstract

Purpose This paper aims to examine whether high levels of financial inclusion is associated with greater financial risk. Design/methodology/approach The study uses regression methodology to estimate the effect of financial inclusion on financial risk. Findings The findings reveal that higher account ownership is associated with greater financial risk through high non-performing loans and high-cost inefficiency in the financial sector of developed countries, advanced countries and transition economies. Increased use of debit cards, credit cards and digital finance products reduced risk in the financial sector of advanced countries and developed countries but not for transition economies and developing countries. The findings also show that the combined use of digital finance products with increased formal account ownership improves financial sector efficiency in developing countries while the combined use of credit cards with increased formal account ownership reduces insolvency risk and improves financial sector efficiency in developing countries. Research limitations/implications The paper offers several implications for policy and financial regulation. It suggests policies that would reduce the financial risk that financial inclusion poses to the financial sector. Originality/value The recent interest in financial inclusion and the unintended consequences of policy-driven financial inclusion in some parts of the world is raising concern about the risks that financial inclusion may introduce to the formal financial sector. Little is known about the risks that financial inclusion may pose to the financial sector.

Financial inclusion and legal system quality: are they correlated?

“…The two financial inclusion variables used in this study are considered to be financial access indicators, namely, ATMs per 100,000 adults and bank branch per 100,000 adults. These two indicators have been widely used as measures of financial access and measures of financial inclusion by several studies in the literature such as Neaime and Gaysset (2018), Emara and El Said (2021) and Ozili (2021). The legal system quality indicators are the enforcing contracts index, strength of legal rights index, resolving insolvency index, strength of insolvency framework index and time to resolving insolvency index.…”

Does Economic Policy Uncertainty Reduce Financial Inclusion?

“…They found that increased lending to small and medium-sized enterprises (SMEs) reduced the size of NPLs and lower the probability of default by financial institutions. Ozili (2021b) showed that greater levels of financial inclusion would improve the cost efficiency of the financial sector in developing countries. Markose et al (2020) examined the economic viability of financial inclusion programs in India, and showed that higher financial inclusion programs, under the Pradhan Mantri Jan-Dhan Yojana (PMJDY) scheme, led to cost inefficiency among public sector banks.…”

Does financial inclusion reduce non-performing loans and loan loss provisions?

“…The positive impact is magnified when banking markets are less concentrated. Ozili (2021a), in a cross country analysis, examine whether high levels of financial inclusion are associated with greater financial risk in the banking sector. Financial risk was measured using the nonperforming loan ratio and cost to income ratio.…”