Financial inclusion’s contribution to financial stability reinforced through new AFI research

Over the last year, AFI has partnered with five member institutions (National Bank of Rwanda, the BCEAO, the National Bank of Cambodia, Banco Central del Paraguay, and the Palestine Monetary Authority) and the University of Luxembourg on a research project to test the hypothesis that financial inclusion strengthens, rather than compromises, financial stability. At the 2024 AFI Global Policy Forum in San Salvador, Prof Dirk Zetzsche of the University of Luxembourg presented early findings from the project.

The research conducted so far has focused on analysis of, and simulations based on, global data sets on financial inclusion and financial soundness, in order to identify key linkages between financial inclusion and financial stability. While highlighting the cautious, early nature of the findings, Prof. Zetzsche highlighted a number of significant effects of financial inclusion, including:

• Countries with strong advancement in financial inclusion have stronger regulatory capital bases;
• Financial inclusion can be associated with greater bank profitability across a number of specific indicators;
• Greater financial inclusion equates to a greater number of non-performing loans, but not beyond financial institutions’ expectations and not affecting Tier 1 capital held;
• Overall, the health of financial systems seems to benefit from an enhanced degree of financial inclusion.

The AFI research initiative will continue through several phases, including exploration of the relationship of financial inclusion to monetary policy effectiveness, and country deep dives. Updates will be shared through the AFI website and at future AFI events.