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Nexus of financial inclusion, competition, concentration and financial stability: Cross-country empirical evidence

Mallika Saha (School of Finance, Zhongnan University of Economics and Law, Wuhan, China and Department of Accounting and Information Systems, University of Barishal, Barishal, Bangladesh)
Kumar Debasis Dutta (School of Finance, Zhongnan University of Economics and Law, Wuhan, China and Department of Finance and Banking, Patuakhali Science and Technology University, Patuakhali, Bangladesh)

Competitiveness Review

ISSN: 1059-5422

Article publication date: 13 April 2020

Issue publication date: 25 May 2021

787

Abstract

Purpose

Since the strike of the 2007-2008 global financial crises, financial stability has been discussed with immense interest in academic and policy circles. Following this essence, this paper aims to investigate the nexus of financial inclusion, competition concentration and financial stability.

Design/methodology/approach

To analyze this relationship, this study uses different inclusion indices constructed by principle component analysis, Boon indicator, different concentration measures and Z-score, for a sample of 92 countries and subsamples based on income and economic grouping of those countries as well as for pre- and post-crisis episodes over the period of 2004-2014. This study also investigates the variation in inclusion–stability relationships in the presence of competition and concentration. This study uses two-step system-generalized method of moments (GMM) and two-stage least square to address the endogeneity.

Findings

The study finds that competition contributes to stability; however, there is evidence of fragility in the presence of concentration in the banking industry. Moreover, this study finds a U-shaped inclusion–stability relationship. The overall results of this study support the competition–stability view and a trade-off between inclusion and stability, which are consistent and robust to alternative econometric tests.

Research limitations/implications

Financial inclusion should be endorsed with caution in low-income, middle-income and emerging countries, and prudent policies should be taken to govern the market concentration to maintain financial stability.

Originality/value

To the best of the authors’ knowledge, this paper is the first to explain the impact of financial inclusion on financial stability in the presence of market heterogeneity.

Keywords

Acknowledgements

The authors acknowledge the insightful suggestions and comments from the three anonymous reviewers and the editor, Competitiveness Review (Dr Philippe Gugler) that significantly improved the paper.

Citation

Saha, M. and Dutta, K.D. (2021), "Nexus of financial inclusion, competition, concentration and financial stability: Cross-country empirical evidence", Competitiveness Review, Vol. 31 No. 4, pp. 669-692. https://doi.org/10.1108/CR-12-2019-0136

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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