Financial Inclusion and Financial Stability: Current Policy Issues

33 Pages Posted: 22 Dec 2010 Last revised: 15 Jan 2011

See all articles by Alfred Hannig

Alfred Hannig

Alliance for Financial Inclusion (AFI)

Stefan Jansen

Infusive Intelligence

Date Written: December 21, 2010

Abstract

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.

Keywords: financial inclusion, financial stability, costs and benefits

JEL Classification: E44, G15, G18, G2''8 G21, G28

Suggested Citation

Hannig, Alfred and Jansen, Stefan, Financial Inclusion and Financial Stability: Current Policy Issues (December 21, 2010). ADBI Working Paper No. 259. Available at SSRN: https://ssrn.com/abstract=1729122 or http://dx.doi.org/10.2139/ssrn.1729122

Alfred Hannig (Contact Author)

Alliance for Financial Inclusion (AFI) ( email )

Bangkok
Thailand

Stefan Jansen

Infusive Intelligence ( email )

132 Mulberry St
Ste 501
New York, NY NY 10013
United States
6176788820 (Phone)

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