Financial Inclusion and Financial Stability

The goal of many emerging economies is to strengthen the capacity to formulate and implement their own growth-oriented, poverty-reducing policies. Too large (however defined) economic inequality can create distortions in economic development and increase the risk of financial instability. One of the obstacles in achieving this goal is that in some countries (like India or a lot of African economies) large parts of population are “financially excluded”, usually the ones that are poor and disadvantaged. They have no access to bank services, from basic bank account to other financial services like loans so, they are often satisfying demand for those services on the grey market, which is much more expensive. Unbanked population can reach up to ¾ of total population. Not only households but SME can be deprived of adequate financial services.

Financial exclusion does not have only microeconomic consequences as those excluded have less opportunity to grow out of poverty and prosper. It can have macroeconomic costs like negative impact on: quality and sustainability of economic growth, unemployment and fiscal revenues as those activities are usually in the shadow economy. All those can contribute to financial instability.

Increasing financial inclusion is a complex and difficult task that requires a holistic approach where both demand and supply-side constraints need to be addressed. These range from improving financial literacy, enhancing consumer protection and improving the competitiveness of the financial system. Enabling different financial services at affordable costs to previously excluded parts of society is an important part of this agenda. For example, efficient monetary policy and efficient payment systems can contribute to this goal. Technological innovations like mobile banking can ease supply-side constraints and lower intermediation costs. Furthermore, efficient payment systems can facilitate regional integration in financial services which can have positive impact on financial inclusion. Adequate financial regulation can help from increasing competition in financial system, enabling access to services for those who do not have sufficient balances to open a bank account to identifying and managing risks in the system. For the authorities, the goal should be promoting financial inclusion while preserving financial stability.

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