FINANCIAL INCLUSION:

Financial Inclusion: it is defined as the availability and equality of opportunities to avail

financial services. It is a process by which individuals and businesses can access appropriate,
affordable, and timely financial products and services. These include; Banking, loans, equity,
and insurance etc. in simple words, it means providing financial services to the one which
are not been provided with these services yet (vast section of disadvantaged and low
income groups)

Why Financial inclusion?

- Overcoming poverty
- Empowering people
- Social Stability
- Growth of Alternate Micro Economy
- Parallel economic development

INTRODUCTION:

Financial inclusion is a key factor in reducing poverty and inequality by providing access to
financial products and services such as savings, credit, insurance, and payments. The World
Bank and G-20 have led initiatives to expand financial inclusion in developing and emerging
countries. Financial inclusion expands the deposit and loan portfolio and diversifies risk for
banks, making monetary policy more effective in controlling inflation. However, regulatory
pressure to mitigate credit risk and increase bank stability may contribute to the unintended
exclusion of the most disadvantaged customers. HOW? Regulatory pressure on banks to
mitigate credit risk and increase stability may result in banks becoming more risk-averse and
less willing to extend credit to customers who are perceived as having a higher credit risk,
such as those with lower incomes or less established credit histories. This may lead to the
unintended exclusion of these disadvantaged customers from accessing financial services,
even if they have the capacity and willingness to repay loans. Additionally, regulatory
requirements for banks to maintain higher capital ratios and comply with stricter risk
management standards may result in higher costs for banks, which may lead to higher fees
or interest rates for customers, further limiting access to financial services for disadvantaged
customers. Therefore, while financial regulation can enhance financial stability, it should
also take into consideration the potential unintended consequences for financial inclusion,
and policymakers should strive to strike a balance between the two objectives.

Financial inclusion is characterized by an increase in new customers, products, and

infrastructure, which serve as a basis for achieving all the dimensions of financial inclusion.
The financial systems of Latin American and Caribbean countries are less dependent on
banks, with equity and bond markets playing a more important role. Conversely, Sub-
Saharan African countries remain underdeveloped and dependent on banks. Financial
inclusion is necessary to promote financial stability and is a strong manifestation of public
authorities' interest in reducing poverty and promoting inclusive economic growth through
access to finance for all segments of society.
Literature Review:
The literature review examines several studies on the relationship between financial
inclusion and financial stability. The review focuses on studies conducted on an
international sample of countries, with a particular emphasis on studies conducted in the
African and Asian regions.
The findings suggest that financial inclusion can have positive effects on financial stability,
especially when it is related to the expansion of deposits and savings rather than credit
expansion. HOW?
When financial inclusion is related to the expansion of deposits and savings, it can
contribute to increased financial stability in several ways.
Firstly, by providing individuals and businesses with access to safe and affordable savings
accounts, financial institutions can mobilize savings, which can be used to finance
investments and stimulate economic growth. This can also provide a stable source of
funding for banks, reducing their reliance on short-term borrowing, and making them less
vulnerable to liquidity shocks.
Secondly, by providing individuals and businesses with access to payment services, financial
institutions can facilitate transactions and reduce the need for cash-based transactions,
which can be costly and risky. This can also help to reduce the costs associated with money
transfers, which can be particularly high for those living in remote and underserved areas.
In contrast, credit expansion can be destabilizing if not managed properly. Excessive lending
can lead to a buildup of non-performing loans, which can erode bank balance sheets, reduce
profitability, and increase the risk of systemic financial instability. The text suggests that
credit expansion can weaken financial stability because it can lead to increased credit risk
and potential loan defaults, which can have negative effects on the overall financial system.

Overall, when financial inclusion is focused on expanding savings and deposit accounts, it
can contribute to greater financial stability by promoting a more diverse and stable funding
base for banks, reducing the reliance on short-term borrowing, and by reducing the need for
costly and risky cash-based transactions.

The review also suggests that competitiveness in the banking sector can enhance financial
inclusion and contribute to increased stability, but the relationship between
competitiveness and financial stability is complex and inconclusive. Financial regulation is
found to increase bank resilience and prevent financial instability, but it may also reduce
financial inclusion in some contexts. HOW?
Financial regulation can increase bank resilience and prevent financial instability by setting
standards and guidelines that banks must follow in order to ensure their safety and
soundness. For example, regulation can require banks to hold a certain amount of capital as
a cushion against losses or to undergo regular stress tests to assess their ability to withstand
adverse economic conditions.

However, financial regulation can also have unintended consequences that may reduce
financial inclusion in some contexts. For example, regulatory requirements may make it
more expensive or difficult for small, rural, or informal financial institutions to operate,
which can limit access to financial services for certain populations. Similarly, regulations that
require extensive documentation or identification requirements may prevent some
individuals from opening bank accounts or accessing credit.

It is important for policymakers to strike a balance between promoting financial stability and
ensuring financial inclusion. This may require targeted policies that address the specific
needs and circumstances of different populations, as well as ongoing evaluation and
refinement of regulatory frameworks to ensure that they are achieving their intended goals.

The review concludes that studies on the relationship between financial inclusion and
financial stability in Sub-Saharan African and Latin American and Caribbean countries are
still scarce and inconclusive.

Literature review:
The impact of financial inclusion on financial stability is not straightforward and varies
depending on the specific measures used. Access to payment and savings accounts can have
a positive or neutral effect on financial stability, whereas credit expansion weakens it.
Competitiveness in the banking sector can increase financial inclusion, reduce costs, and
induce banks to take fewer risks, thus contributing to increased stability. Financial
regulation can also increase bank resilience, improve asset quality, and prevent
unsustainable bank credit growth. However, financial regulation can reduce financial
inclusion in some contexts. The relationship between financial inclusion, competitiveness,
and financial stability is complex, and studies applied to sub-Saharan African and Latin
American countries are still scarce and inconclusive.