Financial Inclusion and Financial Stability in Sub-Saharan Africa: Complementary or Trade-offs

• Published in: Journal of Business and Social Review in Emerging Economies Vol. 10; no. 2
• Main Authors: Jima, Meshesha Demie, Makoni, Patricia Lindelwa
• Format: Journal Article
• Language: English
• Published: CSRC Publishing 30.06.2024
• Subjects: Causality; Cointegration; Complementarity; SSA; Sustainability
• ISSN: 2519-089X; 2519-0326
• DOI: 10.26710/jbsee.v10i2.2990

Purpose: Academics, policymakers, regulators and other stakeholders have expressed interest in the relationship between inclusive financial systems and financial stability so as to ensure sustainable development. However, results of prior studies on the interactions between financial inclusion and financial stability have yielded mixed results across countries and regions. Herein, we examined causality between financial inclusion and stability of the financial sector in twenty-four Sub-Saharan African (SSA) economies, using data spanning 2000 to 2019, to address gaps in the existing literature.   Design/Methodology/Approach: We used a principal component analysis to develop a composite financial inclusion index. Thereafter, we evaluated the data’s stationarity properties using various unit root tests. Lastly, we applied ARDL to analyse the short and long-run cointegrating relationships between financial inclusion and financial stability, and confirmed causality of the two factors using Granger testing. Findings: This study established a significant long-run relationship and bidirectional causality between financial inclusion and financial stability, thus implying complementarity. Therefore, governments and oversight bodies should account for the synergy between an inclusive financial sector and financial stability when formulating financial and macroeconomic policies and regulations in the SSA countries. Implications/Originality/Value: We underscore the importance of financial market stability in fostering financial inclusion of all members of society, particularly during periods of crisis.