Achieving financial stability is undoubtedly an essential condition for a healthy implementation of the financial system. Indeed, one of the biggest lessons to be drawn from the global financial crisis of 2008 is the achievement of financial stability and at the same time sustainability. Developing countries have focused on financial inclusion to ensure financial stability as part of their economic and financial development strategies and are looking for new ways to expand the financial base.
Financial expansion involves all individuals and companies needing financial services to be able to easily access and use effectively the financial products they need. Effective use requires that individuals and businesses have the knowledge and skills to take advantage of these products. Spreading to the financial base should not be understood as access to financial services only. It is also important that the financial services are regular and of good quality.
The Global Inclusion Strategies, Financial Inclusion Action Plan (FIAP) was created at the G20 Seoul Leaders’ Summit in 2010 in South Korea. It has also been strengthened by the Global Partnership for Financial Inclusion (GPFI) created by the G-20.
There is a strong relationship between financial inclusion and financial stability. A number of studies in this area suggest that financial inclusion may have an impact on financial stability. For example, one of the remarkable studies on financial stability and spreading is Peter J. Morgan and Victor Pontines. The authors have proven that they include more than 150 economies in which financial inclusion can contribute to financial stability. In their work they have shown that the increase in the share of loans which SME’s received contribute to financial stability by reducing the amount of non-performing loans.
Other contributions to financial stability of financial inclusion can be stated as follows: First, by increasing the diversity of bank assets, it increases lending to small firms and reduces the risk level of the bank’s loan portfolio. By reducing the indebtedness of individuals in the portfolio, they dissipate the risk and reduce the volatility. Similarly, it leads to a reduction in the links between the different risks. Again, the increase in small savings holders increases the volume and stability of deposits by reducing banks’ commitment to non-core financing during the crisis. In addition, the financial inclusion contributes to financial stability by facilitating the transmission mechanism of monetary policy.
However, in the case of certain conditions, spreading to the financial inclusion can lead to financial instability. For example, the expansion of the credit pool by lowering the borrowing quality – as with subprime loans in the US – could lead to financial instability. Or, for banks to use their credit ratings to reach smaller income groups for their own purposes, it will lead to financial instability. Where financial institutions and markets are not adequately regulated, excessive lending can lead to financial instability by regulatory inefficiency in the market.