Financial inclusion and financial stability in Sub-Saharan Africa

Abstract

This study empirically investigates the impact of financial inclusion on financial stability of the banking sector across 37 Sub-Saharan African (SSA) countries using country level data from 2005 to 2019. The financial sector plays a crucial role in allocating financial resources to the economy of every nation, and financial stability is a crucial macroeconomic requirement for this function of allocating financial resources to be carried out in a sustainable manner. Therefore, empirical research that tries to understand the link between financial inclusion and financial stability is essential, particularly in SSA, a developing region where few of such studies were conducted. This study uses the Dynamic Common Correlated Effects, the Augmented Mean Group, and the Quantile Regression estimators to estimate the underlying link. The study finds evidence of a positive and statistically significant impact on financial stability of the banking sector in the 37 SSA countries. In line with the institutional theory, financial inclusion has a positive and statistically significant impact on financial stability of the banking sector in SSA countries with low levels of financial stability and economic development. In addition, an increase in banking sector financial stability in the previous period has a positive and statistically significant impact on banking sector financial stability in the current period, ceteris paribus. It is recommended that policymakers should strengthen coordination among regulatory and supervisory institutions to promote financial inclusion in SSA countries and the region in a safe and sustainable way. They should cross-fertilize skills and competencies, target financially excluded populations and increase financial literacy among low-income households.