An Examination of the Effect of Financial Inclusion on Financial Stability: Evidence From a Panel of Ten African Countries

Abstract

This paper examines the impact of financial inclusion on financial stability for a group of 10 African countries using the system Generalized Method of Moments (GMM) panel estimator for the period running from 2004 through 2019. To shortlist the financial inclusion indicators, the study used the Principal Component Analysis to construct the financial inclusion index. Economic growth and inflation variables are used as control variables. To explore the stationarity of the variables, the study applied the Im, Pesaran, and Shin, ADF Fisher, and the PP-Fisher panel unit root tests. The sample countries include Botswana, Cameroon, Kenya, Madagascar, Morocco, Mozambique, Nigeria, Uganda, South Africa, and Zambia. The results from the panel unit root tests indicate that the four variables in the system, including the financial inclusion index, bank Z-score, economic growth rate, and inflation, are level stationary. The results from Pearson correlations provided cursory evidence that financial inclusion and financial stability are significantly positively correlated. The results from the GMM panel estimator indicate that financial inclusion has a significantly positive effect on financial stability. This finding entails that access to financial services engenders bank stability. Policy implications are discussed.