Financial Inclusion, Competition and Financial Stability: New Evidence from Developing Economies

Abstract

The aim of this study is to examine the effect of competition and financial inclusion on financial stability for 3 emerging economies of South Asia, i.e., Pakistan, India, and Bangladesh, during 2015-2023. The contribution of this study to the existing literature is to include testing for non-linear effects of FI on financial stability as well as exploring the interaction between FI and financial stability. The results of this study will provide insights to policymakers for making financial stability more robust by incorporating financial inclusion. The results of this analysis conclude that financial inclusion negatively affects financial stability for these emerging economies of South Asia. On the other hand, financial stability is positively affected by financial inclusion. The report highlights financial development as one of the most crucial aspects to allow financial inclusion to positively influence financial stability. The non-linear effect is achieved by incorporating the square of financial inclusion. The results of this analysis conclude that financial inclusion can improve financial stability for these emerging economies of South Asia. Therefore, financial inclusion should be at the top of policymakers’ priorities for developing countries to improve financial stability. The results of this analysis can provide valuable insights to policymakers to design financial stability more robustly by incorporating financial inclusion. The policymakers can design a more robust financial landscape for developing countries by incorporating financial inclusion.