Financial Inclusion and Financial Stability: Current Policy Issues

Alfred Hannig and Stefan Jansen
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Alfred Hannig: Asian Development Bank Institute
Stefan Jansen: Asian Development Bank Institute

No 259, ADBI Working Papers from Asian Development Bank Institute

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; current policy issues (search for similar items in EconPapers)
JEL-codes: E44 G15 G18 G20 G21 G28 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010-12-21
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (123)

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