By Robert Cull, Asli Demirgüç-Kunt, and Timothy Lyman, published by CGAP (Consultative Group to Assist the Poor), May 2012, 4 pages, available at: http://www.cgap.org/publications/financial-inclusion-and-stability-what-does-research-show-0
This CGAP brief reviews empirical research on the relationship between broad-based financial inclusion and financial stability. The authors first examine linkages among development, income equality and poverty reduction. Although they conclude that there is limited empirical evidence on the relationship between financial inclusion and financial stability, research has indicated that broad-based economic development leads to economic growth, reduces income inequality and reduces poverty. The authors posit that these benefits can indirectly exhibit a positive effect on financial stability. Increased access to financial services, for example, can lead to increased savings and promote stability at the household and individual level. And these developments, in turn, could contribute to overall stability in the economy.
The authors also consider cases in which irresponsibly delivered financial services adversely affect micro-level stability. Inappropriate financial products, for instance, have been positively correlated with lower levels of education. The authors also note research indicating losses on small loans pose less systemic risk than do losses on larger loans. The entry rate of new, small firms and their growth is also positively associated with economic development. Greater financial development and inclusion at the micro-level, then, might coincide with greater overall stability for national economies. Evidence also suggests that wider financial inclusion can enhance social and political stability, which in turn could contribute to greater financial system stability.
The authors consider whether financial exclusion could lead to greater instability. Research indicates that underdeveloped financial systems have disproportionately negative consequences for small firms and low-income households. High rates of financial exclusion also result in reliance on informal financial services, which the authors consider poor substitutes for those offered in the formal sector. Indeed, pyramid schemes marketed as savings and investment opportunities have been linked to social unrest and lack of confidence in the banking system.
The authors determine that the literature reviewed only indirectly connects financial inclusion to financial stability, but they identify standard-setting bodies (SSBs) such as the Basel Committee on Banking Supervision (BCBS) as a potential partner in exploring the specifics of the relationship between the two. Research institutions and academia currently produce the majority of research on financial inclusion and stability, yet SSBs have a direct interest in this endeavor and are among the best-positioned to contribute to such research. The authors argue that (1) the risks of money laundering and terrorist financing, and (2) calls for regulatory reform, improved consumer protection and financial literacy due to the recent financial downturn provide sufficient cause for SSBs to adopt a more active role in research as well as policy and regulation.
The authors conclude that significant gaps remain in the literature and highlight a number of unexplored ways that financial inclusion may contribute to political, social and financial stability such as: what contributions can financial consumer protection and financial integrity offer to ensure that financial inclusion is pro-stability?; what tools are best-suited to meet the needs of the financially excluded?; how can we measure financial inclusion?; and what direct role can increased formal savings have on stability?
By Brendan Millan, Research Associate
About CGAP (Consultative Group to Assist the Poor): CGAP is a US-based nonprofit policy and research center dedicated to providing financial access to poor people worldwide. CGAP is supported by approximately 30 development agencies and private foundations. Its mission is to provide market intelligence, to promote standards and to offer advisory services to governments, microfinance providers, donors and investors. CGAP reports taking in USD 20.9 million in total revenue for fiscal year 2010.
Sources and Resources:
MicroCapital.org story, December 8, 2009, “MICROFINANCE PAPER WRAP-UP: Microfinance Tradeoffs: Regulation, Competition, and Financing, by Robert Cull, Asli Demirgüç-Kunt & Jonathan Morduch”, https://www.microcapital.org/microfinance-paper-wrap-up-microfinance-tradeoffs-regulation-competition-and-financing-by-robert-cull-asli-demirguc-kunt-jonathan-morduch/
MicroCapital.org story, November 24, 2009, “MICROFINANCE PAPER WRAP-UP: Banks and Microbanks, by Robert Cull, Asli Demirgüç-Kunt & Jonathan Morduch”, https://www.microcapital.org/microfinance-paper-wrap-up-banks-and-microbanks-by-robert-cull-asli-demirguc-kunt-jonathan-morduch/
MicroCapital Universe Profile: CGAP (Consultative Group to Assist the Poor), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+%28Consultative+Group+to+Assist+the+Poor%29
Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/
Similar Posts:
- SPECIAL REPORT: October 28 is Deadline for MFIs to Apply to Partner with CGAP via “Microfinance Digitization” Community of Practice
- MICROFINANCE PAPER WRAP-UP: “Climate Risk and Financial Inclusion: A Regulatory Perspective on Risks and Opportunities;” by Peter Knaack, Peter Zetterli
- MICROFINANCE PAPER WRAP UP: “Women Agents for Financial Inclusion: Exploring the Benefits, Constraints and Potential Solutions,” by Emilio Hernandez et al, Published by CGAP
- MICROFINANCE PAPER WRAP-UP: “Financial Inclusion in Niger: Challenges and Opportunities,” by Yoro Diallo et al, Published by IMF
- MICROFINANCE PAPER WRAP-UP: “Mobile Money, Interoperability and Financial Inclusion;” by Markus K Brunnermeier et al; published by National Bureau of Economic Research (NBER)
