The widespread availability of financial services and sustained economic expansion is a topic of debate between the two schools of thought. There are good arguments to be made for each of these perspectives. The preliminary studies support the hypothesis that expanding access to banking and other financial services may reinforce and promote economic stability. The second piece of evidence comes from studies conducted to disprove the idea that the broader availability of financial services will increase market volatility. Each of these specialized academic journals will be introduced and summarized below.
An empirical literature review conducted by (Islam et al., 2013) found that the relationship between inclusion, economic growth, and inequality is poorly understood. Until recently, reliable sources of knowledge were few. Therefore this was one explanation. The best strategy thus far has been to increase people's ability to open savings accounts and make digital payments (Hussain et al., 2018). Increasing people's access to credit, on the other hand, may have very modest impacts on alleviating poverty and reducing inequality. The results of this study on microcredit were disappointing even once the borrowers' achievements were accounted for. There is no way to minimize the significance of these results.
Several academic research has linked access to banking services to excellent financial stability. Findings from this research suggest that people who have access to a wide range of financial services are more likely to save money and make better use of their savings. The impact of capital available on the long-term viability of Armenia's small and medium-sized enterprises (SMEs) was studied by (Jalil & Feridun, 2011). They focused on how SMBs fared when given more accessible access to funding. Other indicators of the bank's overall financial health were evaluated in addition to the z score and nonperforming loan (NPL) percentage.
To conclude that financial inclusion had a positive and substantial effect on lending to SMEs, the authors employed an unbalanced panel data system-GMM dynamic panel estimate for 2005–2011. We draw this conclusion after seeing that financial inclusion has an effect (SME). Consideration of the time frame led to this verdict.
(Esquivias et al., 2021) conducted research in 2019 to learn more about the state of the banking industry and how easy access to banking services affects its overall health. The argument goes like this: on the one hand, if capital is raised, deposits will grow, reducing the marginal cost of banking. However, in a financially accessible market, asymmetric information about risky borrowers may lead to a rise in the number of loans that are not returned as agreed upon. Information from 2,635 banks across 86 countries was analyzed for the research conducted between 2004 and 2012. Instead of using a more dynamic risk or instability evaluation approach, several financial institutions' z-scores were employed as a stand-in.
Additionally, the research employed demographic and regional data as replacements for financial services. Their investigation uncovered data that lent credence to the idea that more accessible access to banking services is associated with more stable financial organizations. According to the authors, an inclusive financial system may increase low-interest deposits, which can help banks save money on their marginal funding costs and provide them more bargaining leverage in the money market. If banks establish an inclusive financial system to increase low-interest deposits, these potential advantages of financial inclusion might be realized. This would happen if more people had access to financial services due to the positive effect of financial inclusion. When more individuals get access to banking, this is what happens. Based on their findings, (Esquivias et al., 2021) conclude that financial inclusion is a formidable tool that may help banks maintain the security of their lending system. (Shahbaz et al., 2018) examination of 189 economies between 2004 and 2017 reveals, most importantly, that countries with higher degrees of financial inclusion are less likely to be negatively impacted by significant drops in lending and borrowing. (Safi et al., 2021) Findings from this research provide empirical support to the idea that a robust financial inclusion process is linked to a stable financial market during times of crisis. The correlation between the two variables serves as empirical evidence.
(Giuliano & Ruiz-Arranz, 2009) proposed enhancing the financial infrastructure and introducing mobile banking to provide access to financial services for more people. These advancements in technology allow countries without the necessary physical and financial infrastructure to permit the transmission of financial information to consumers who are not currently being serviced. This creates whole new commercial possibilities for those countries. (D. Zhang & Broadstock, 2020) looked into the growth of financial education programs in India. They found that customers in rural areas are deterred from using digital and more advanced financial services due to a lack of access to physical and digital banking facilities, low financial literacy, low income, and no formal employment opportunities. Due to the abovementioned concerns, customers in rural areas are discouraged from using digital and complex financial services. Internet banking is quickly replacing ATMs as the preferred means of transferring large sums of money because of its inexpensive transaction fees and convenient accessibility. Substituting online banking for the actual exchange of cash might be a step toward a cashless society.
On the other side, (Lee et al., 2020) found a bidirectional connection between the two ideas, concluding that long-term social participation increases as one's financial situation improves. Based on his observations, he reached this conclusion after realizing there is a connection between the two ideas. In a study, (Ali et al., 2019) looked at the impact of financial inclusion on poverty, economic inequality, and the security of national economies in Tunisia. Given their high rates of economic development and generally stable financial systems, the countries that make up this region provide an interesting case study. However, the area's population is quite heterogeneous and dispersed across a broad geographical range. The provided evidence indicates that greater access to financial services is associated with greater economic security and lower income inequality. This line of thinking holds that societal factors are crucial in determining whether or not a person will have access to conventional banking services. One of the fundamental tenets of this school of thinking is that the social structure plays a crucial role in determining which population members have access to formal financial services. Financial inclusion helps close the income gap by giving low-income households a reason to strive toward financial security. Also, low-income communities actively seek and use available financial resources to improve their economic status (D. Zhang, 2021). Different levels of financial inclusion exist between China and the BRICS (Brazil, Russia, India, China, and South Africa) nations, and (Fernandes et al., 2018) validated the role of demographic characteristics (such as education, age, and income) in this regard. The disparity may be explained by the fact that China has a lower degree of financial inclusion than the other BRICS nations. This was done as part of a more extensive study looking at how many people in China and the other BRICS (Brazil, Russia, India, and China) countries have bank accounts and what variables contribute to that level of financial inclusion (South Africa being the sixth).
Other factors, such as GDP per capita and governance indices, have been proven relevant in predicting financial inclusion and depth among countries; however, credit information and enforcement are even more critical. This is thus because credit data and its enforcement have a more significant bearing on explaining wealth than any other factor. (Lamperti et al., 2021) found that the percentage of businesses experiencing difficulties accessing Finance was lower in countries with higher rates of inclusion. This conclusion agrees with what we know about our monetary resources. Also, as (Li & Luo, 2019) show, increased financial inclusion helps stabilize consumption by making it less vulnerable to output swings. Higher financial inclusion rates have been found to have this impact by easing consumer spending. One indicator of this effect is the positive role that greater financial inclusion has in facilitating more consistent spending. (Su et al., 2020) argues that the impact of financial inclusion on poverty is not much mitigated when accounting for per capita income. (Naqvi et al., 2018) demonstrate that income disparity may be reduced by using the expansion of bank branches as a surrogate for financial inclusion. The results of this research run counter to those of a prior one by (Thomas et al., 2007). This study's results directly contradict those of the previous one, even though the assessment period may or may not be relevant to the effects. Longitudinal studies by researchers like Gourène and Mendy have shown a causal relationship between increased access to financial services and higher economic growth rates (more fantastic than four years). This connection may lead to either upward or downward economic development (2017).
Several arguments have been made for why it is vital to aim toward a higher degree of financial inclusion. These arguments help to paint a picture of how financial inclusion could contribute to monetary security. From a macroeconomic perspective, more readily accessible credit might mean that banks and other financial institutions have access to more funding. The banking and finance industries may benefit from this. When more people have access to credit, more people can join the economy, which has a multiplier effect that helps the economy grow. Recently, a renewed focus has been on the need to achieve sustainable development that benefits all segments of society. Several things have contributed to this renewed curiosity. Studies conducted by (Chandio et al., 2020) suggest that countries' economies thrive when their citizens have easier access to banking and other financial services. (Yu, 2021) research highlights the significance of financial literacy in boosting discretionary income for rural households and SMEs (2019).
(Yu, 2021) argue that the parts of the economy that correspond to these two age groups are the most vulnerable to uncertainty. Recent research has linked the size of the informal banking business to the availability of sources of credit, suggesting that efficient economic functioning may be attained with a smaller informal banking sector. This is still the case even in settings with more limited informal banking sectors. In addition, individuals from all walks of life must have access to a complete suite of financial options. The act of charging exorbitant interest on loans is known as usury. If someone has difficulty securing a loan via more conventional means, they may resort to usury. This conduct may harm the economy and the effectiveness of monetary policy as a whole.
However, new studies have cast doubt on whether financial inclusion has a beneficial influence on security. Particular attention is paid in this field of study to perils that disproportionately affect individuals with fewer resources. Participation in the financial sector is more expensive for these communities because of the extra time and resources needed to gather information and complete transactions due to their poor credit histories and lack of collateral. The same holds for these two market factors. Financial inclusion and financial stability are two objectives that may compete with one another, or they may complement one another, as explored by (Hoberg & Moon, 2017). They reasoned that a population's level of financial inclusion depends not only on its availability of financial services but on how much its members and businesses utilize such services. This is because it is impossible to gauge a population's economic engagement based on whether they have access to these services. According to what they have stated, just because individuals and companies have many potential avenues for obtaining capital does not indicate that they put that money to good use. According to the results, there is a trade-off between having financial resources and feeling secure. Increased chances of default on payments are associated with easier access to credit for people and corporations. This is because they would have more disposable income to make purchases on credit.
Although (Nasir et al., 2019) observed a conditional connection between access to financial resources and financial stability, they found it significant. However, the availability of financial resources was a prerequisite for seeing this correlation (2009). Nonperforming loans (NPLs) with risk premiums attached were shown to have a statistically significant negative correlation with access to credit. (Yandan & Zhang, 2009), a separate team of researchers, constructed an equilibrium model to examine the connection between GDP, nonperforming loans, and inequality about the limits of financial inclusion. Six Asian and African countries, ranging in economic development, were surveyed to collect information at the business level. The study's authors conclude that elements specific to each country moderate the impact and repercussions of financial inclusion and stability.
However, (J. Zhang et al., 2012) provided an alternative, nonlinear explanation for the correlation between financial inclusion and financial stability. They claimed that insufficient data was a factor in their reasoning, yet they offered none. While previous studies had employed conventional least squares, (Degl’Innocenti et al., 2017) analysis of time-series data included a radical departure. Three factors negatively affect financial inclusion: domestic credit, income disparity, and financial integration. These results were confirmed, and others were found that were consistent with them. The study examined the link between financial integration, economic inequality, and domestic lending.
In this part, we will briefly analyze the studies undertaken on the relationship between financial inclusion and macroeconomic stability. Previous studies appear to have overlooked, for the most part, the role of financial inclusion in maintaining stability when looking at the Asian region and utilizing data from the bank level. Our research focuses primarily on characteristics, such as bank and macroeconomic factors, and the financial inclusion variable is significant to us.