IMF Working Papers

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Sami Ben Naceur, Bertrand Candelon, and Farah Mugrabi. "Systemic Implications of Financial Inclusion", IMF Working Papers 2024, 203 (2024), accessed November 12, 2024, https://doi.org/10.5089/9798400290763.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This study contributes to the literature by analyzing the impact of financial inclusion (FI) on various bank risk dimensions, including systemic risk, which has been underexplored. We expand on recent research by examining not only the type of financial services, but also the source of FI, particularly the role of non-commercial banks (NCB). Our findings reveal that contrary to developed countries, credit expansions are linked to lower commercial banking risks, underscoring the benefits of loan diversification in developing and emerging economies,. However, while FI in deposits generally reduces individual banking risks, its effect on systemic risk is weaker in these countries, likely due to limited asset diversification. Moreover, NCBs tend to increase systemic and idiosyncratic risks for commercial banks through competitive pressures in the loan and deposit markets. Our results suggest that coordinating macroprudential policies with credit developments further reduces systemic risk by discouraging excessive risk-taking when banks’ capital is more at stake. Banks with stronger Basel capital ratios show reduced idiosyncratic risks, yet there is evidence that banks may relax these ratios to accommodate lending demands. These insights underscore the necessity for regulators to synchronize macroprudential policies with FI developments and consider NCBs’ role in financial stability.

Subject: Bank soundness, Commercial banks, Credit, Credit default swap, Financial inclusion, Financial institutions, Financial markets, Financial sector policy and analysis, Financial sector stability, Financial services, Loans, Macroprudential policy, Money, Systemic risk

Keywords: Bank soundness, Commercial banks, Credit, Credit default swap, Financial inclusion, Financial sector stability, Global, Loans, Macroprudential policy, Systemic risk

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