1 / 27

Financial Inclusion and Stability: Evidence and Implications

This paper explores the relationship between financial inclusion and stability, examining the impact of a higher level of financial inclusion on financial resilience and the destabilizing effect of a rapid rise in credit growth. Empirical evidence and key challenges are discussed, along with cross-sectional analysis and OLS models. The results suggest that a higher level of financial inclusion does not have a stabilizing effect as such, but it does mitigate the destabilizing effects of higher credit growth.

vstruble
Download Presentation

Financial Inclusion and Stability: Evidence and Implications

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 2nd International Workshop P2P Financial Systems 2016 London, 8-9 September 2016 More inclusive, more stable? The financial inclusion - stability nexus in the global financial crisis Tania Lopez & Adalbert Winkler Centreof Development Finance Frankfurt School ofFinance & Management

  2. Does financial inclusion contribute to financial stability? • This paper

  3. Policymakers (Rahman 2014, Dema 2015) and financial inclusion advocates (GPFI, CGAP, AFI): Financial inclusion not only beneficial for development and growth but also for financial stability Is there evidence for this claim? Does raising financial inclusion represent a policy option for increasing financial resilience? • Motivation

  4. Diversification Loans: a diversified loan portfolio is robust to adverse shocks (Diamond 1984) Deposits: retail deposits more stable than wholesale deposits (however: more depositors does not necessarily imply less wholesale deposits – mature economies) • The inclusion-stability nexus

  5. However, a (rapid) rise in financial inclusion might also lead to financial instability. Inclusion of new and unknown customers with little prior financial experience and low levels of financial literacy (Dell’Ariccia and Marquez 2006, Klapper et al. 2013, Boz and Mendoza 2014, Example: Microfinance crises) Does a rapid rise in financial inclusion mitigate or reinforce the destabilizing effect of a rapid rise in credit growth? • Level versus change

  6. is scarce due to a lack of data suggests that a higher level of financial inclusion is associated with more stability (Han and Melecky 2013, Morgan and Portines 2014, and – with a caveat – Sahay et al. 2015) no test of financial stability implications of changes in inclusion We contribute to this literature • Empirical evidence

  7. Appropriate variables depicting inclusion and stability. No consensus on this. Inclusion: range of indicators (# of accounts, depositors and borrowers, ATMs, bank branches, loans to specific target groups (SMEs) etc.) Stability: range of indicators (Z-score, NPL-ratio, financial crisis indicators) • Key challenges

  8. Financial instability: boom and bust(Mendoza and Terrones 2008, Schularick and Taylor 2012) Global financial crisis as example Our financial instability variable: depth of the credit crunch after the Lehman default dependent variable: drop in credit growth from 07 to 09 • Contribution

  9. Financial instability variable • Contribution DROPCREDIT0709

  10. Financial inclusion variables Level: number of borrowers served by the banking sector (percentage of the adult population) Change: Growth in the number of borrowers served by the banking sector Key control variables: Compound pre-crisis (04-07) credit growth rate Interaction terms (Pre-crisis credit growth * Pre-crisis level of financial inclusion, Pre-crisis credit growth * Pre-crisis growth in financial inclusion) • This paper

  11. Cross section analysis, OLS models (applying robust standard errors) Focus here on two questions [Boom-bust relationship of financial inclusion also covered in the paper] Question 1: Does a higher level of financial inclusion enhance financial stability? DROPCREDIT0709i = β1 + β2SHAREBORROWERS08i + β3 CreditGrowth0407 + β4 Interaction term + β5 Xi + εi • Methodology

  12. Question 2: What is the impact of a rapid rise in financial inclusion on financial stability? DROPCREDIT0709i = β1 + β2INCLUSION0407i + β3 CreditGrowth0407 + β4 Interaction term + β5 Xi + εi • Methodology

  13. IMF Financial Access Survey (FAS), 189 economies over the period 2004-2014, but much less countries with financial inclusion information for 2004 – 2010 Sample of 60 countries when studying the impact of the pre-crisis change in financial inclusion over the pre-crisis period Sample of 75 countries when analyzing the stability impact of the pre-crisis level of financial inclusion • Data

  14. Banking sector indicatorsPre-crisis Z-SCORE, LIQUIDITY, CONCENTRATION, LOANS-TO-DEPOSIT ratio Macroeconomic Variables Pre-crisis GDP growth, inflation Structural Variables POPULATION, GDPPERCAPITA, Capital Account Openness (KAOPEN) • Other controls

  15. Results • A higherleveloffinancialinclusiondoes not have a stabilizingeffectas such • A higherleveloffinancialinclusionisassociatedwith a mitigatingimpact on thedestabilizingeffectsofhighercreditgrowth in thepre-crisisperiod

  16. Results

  17. Results • A rapid rise in financialinclusiondoes not impactfinancialstabilityifcontrollingforcreditgrowth • The financialinstabilityimplicationsof a rapid rise in creditgrowthareneithermitigatednorenhancedif rapid creditgrowthisaccompaniedby a rapid rise in financialinclusion

  18. Results • Robustnesschecks 18

  19. Discussion • A more inclusive system is more stable • This is in line with previous studies • A word of caution • Credit booms associated with rising financial inclusion do not indicate that “this time is different” (Reinhart and Rogoff 2008) • Raising financial inclusion does not represent a policy option for increasing financial resilience when confronted with a credit boom 19

  20. Discussion • A word of caution • Omitted variable bias: countries with more inclusive financial systems might engage in extra efforts to limit instability which we might not have properly accounted for • More research is needed to disentangle the direct from the indirect effects of financial inclusion on financial stability 20

  21. Thank you very much for your attention

  22. Additional slides

  23. References Boz, E., Mendoza, E.G. (2014). Financial innovation, the discovery of risk, and the U.S. credit crisis. Journal of Monetary Economics. 62(C): 1-22. Dell’Ariccia, G., Marquez, R. (2006). Lending Booms and Lending Standards. The Journal of Finance, 61(5): 2511-2546. Dema, E. (2015). Managing the Twin Responsibilities of Financial Inclusion and Financial Stability. Alliance for Financial Inclusion Viewpoints No. 2, http://www.afi-global.org/sites/default/files/publications/afi_viewpoints_2_final.pdf , accessed 25 February 2016. Diamond, D.W. (1984). Financial Intermediation as Delegated Monitoring. The Review of Economic Studies, 51(3):393-414 Global Partnership for Financial Inclusion (GPFI), 2012. Financial Inclusion – A Pathway to Financial Stability? Understanding the Linkages – Issues Paper, Basel, https://www.gpfi.org/sites/default/files/documents/GPFI%20SSBs%20Conference%20%20Issues%20Paper%203%20Financial%20Inclusion%20%E2%80%93%20A%20Pathway%20to%20Financial%20Stability_1.pdf , accessed 25 February 2016 Global Partnership for Financial Inclusion (GPFI), 2016. Global Standard-Setting Bodies and Financial Inclusion – The Evolving Landscape. http://www.gpfi.org/sites/default/files/-documents/GPFI%20White%20Paper%20final%20prepublication%20version%20March%202016.pdf , accessed 17 March 2016

  24. Han, R., Melecky, M. (2013). Financial Inclusion for Financial Stability: Access to Bank Deposits and the Growth of Deposits in the Global Financial Crisis, World Bank Policy Research Working Paper No. 6577, Washington DC Hannig, A., Jansen, S. (2010). Financial Inclusion and Financial Stability: Current Policy Issues. ADBI Working Paper Series No. 259. Klapper, L., Lusardi, A., Panos, G.A. (2013). Financial literacy and its consequences: Evidence from Russia during the financial crisis, Journal of Banking and Finance. 37(10): 3904-3923Kraft, E., Jankov, L. (2005). Does speed kill? Lending booms and their consequences in Croatia. Journal of Banking & Finance, 29(1): 105–121 Mendoza, E., Terrones, M. (2008). An Anatomy of Credit Booms: Evidence From Macro Aggregates in Micro Data. NBER Working Paper 14049. Cambridge MA. Morgan, P., Pontines, V. (2014). Financial Stability and Financial Inclusion. Asian Development Bank Institute Working Papers No. 488, Tokyo. Rahman, A. (2014). The Mutually-Supportive Relationship Between Financial Inclusion and Financial Stability, Alliance for Financial Inclusion Viewpoints No. 1, http://www.afi-global.org/sites/default/files/publications/afivp1-11.pdf , accessed 12 February 2016. Reinhart, C. M., K.S. Rogoff (2009). This Time is Different . Eight Centuries of Financial Folly, Princeton University Press, Princeton, NJ. 24

  25. Sahay, R:, Cihak, M., N'Diaye, P., Barajas, A., Mitra, S., Kyobe, A., Mooi, Y.N., Yousefi R. (2015). Financial Inclusion: Can it Meet Multiple Macroeconomic Goals?, IMF Staff Discussion Note 15/17, Washington DC, https://www.imf.org/external/pubs/ft/sdn/2015/sdn1517.pdf Schularick, M., Taylor, A. M. ( 2012). Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008. American Economic Review, 102 (2), 1029–61.

  26. Results • Financial inclusion has been subject to a boom-bust cycle

  27. Robustness checks • parsimonious approach • orthogonalization of pre-crisis borrower and credit growth • Different samples (countries > 1 million population, excluding advanced economies) • Different financial inclusion variable and financial instability proxies • Results remain fairly robust

More Related