Optimal financial inclusion for financial stability: Empirical insight from developing countries

Meriem Sebai, Omar Talbi and Hella Guerchi-Mehri

Finance Research Letters, 2025, vol. 71, issue C

Abstract: This paper investigates the impact of financial inclusion on financial stability in 26 developing countries from 2004 to 2020. Using a panel smooth transition regression model, the results reveal a nonlinear relationship between financial inclusion and financial stability. Initially, financial inclusion enhances banking stability. However, beyond a certain point, increased financial inclusion gradually diminishes financial stability, exhibiting an inverted U-shaped relationship. These findings emphasize the importance of adopting a balanced financial inclusion strategy and an adaptive regulatory framework to mitigate potential risks to overall financial stability.

Keywords: Financial inclusion; Financial stability; Nonlinear relationship; Developing countries; Panel smooth transition regression (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:71:y:2025:i:c:s154461232401496x

DOI: 10.1016/j.frl.2024.106467

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