1. Introduction
Financial inclusion is an important component of financial development (
Emara and El Said 2021;
Musau et al. 2018;
Zulkhibri 2016). However, it plays a relevant role in reducing poverty and inequality through the easy and safe availability of financial products and services, such as savings, bank credit, insurance, and payments (
Huang and Zhang 2020;
Jungo et al. 2021). These provide great advantages in improving households’ living conditions when used rationally (
Owen and Pereira 2018;
Zins and Weill 2016). Financial inclusion is a strong manifestation of the interest of public authorities in reducing poverty and promoting inclusive economic growth through access to finance for all segments of society. It should be noted that, in economies where large numbers of people outside the financial system prevail, as is the case in certain Sub-Saharan African (SSA) countries and some Latin American and Caribbean (LAC) countries, the financing of entrepreneurial activities is conditioned by individual or family wealth.
Aware of the great advantages of financial inclusion for households, and in general for financial development, the World Bank and the G-20 have been leading initiatives to expand financial inclusion in developing and emerging countries. Moreover, financial inclusion is an integral part of the four pillars of development support defined by the United Nations, which are summarized as: (1) formulating an employment-oriented growth strategy; (2) strengthening financial inclusion; (3) investing in human development priorities; and (4) delivering high-impact win–win strategies, i.e., multidimensional interventions (
Vo et al. 2021).
More stable banks are more able to offer financial products and services and contribute significantly to increasing financial inclusion (
Musau et al. 2018). Therefore, regulatory pressure to mitigate credit risk and increase bank stability may contribute to the unintended exclusion of the most disadvantaged customers (
Ackah and Asiamah 2016;
Anarfo et al. 2020;
Musau et al. 2018). Besides, banks play a key role in connecting the financial system to the real economy, yet financial inclusion makes monetary policy more effective in controlling inflation by expanding its effect to a larger proportion of the population (
Jungo et al. 2021).
Gaganis et al. (
2021) state that financial regulation can have ambiguous impacts on banking efficiency, and can increase or reduce efficiency depending on context. In these terms,
Atellu et al. (
2021) and
Oduor et al. (
2017) evidenced that the financial crisis showed that financial regulation alone is not able to promote financial stability; therefore, it is necessary to cumulatively use other measures. Financial inclusion is pointed out as one of these measures.
Anarfo et al. (
2020) argue that financial stability strengthens the relationship between financial regulation and financial inclusion.
Financial inclusion is characterized by an increase in new customers, new products, and new infrastructures, which serve as a basis for achieving all the dimensions of financial inclusion, which can be summarized as the demographic and geographic expansion of financial products and services. The increase in new customers implies an increase in the volume of small-value transactions for banks. Besides, the fact that these customers have no banking history and often no mastery in the use of financial products and services may pose threats to banking stability in two main ways: (1) increased operational and infrastructure costs and (2) credit risk (
Musau et al. 2018). Still, financial inclusion can produce positive effects on banking stability through the expansion of the deposit and loan portfolio, specifically increasing risk diversification for banks (
Musau et al. 2018).
The variable reforms implemented in LAC countries have made financial systems more diversified and complex, as well as less dependent on banks, with equity and bond markets playing a more important role, where savings are channeled directly to the market through retailers or financial intermediaries, such as pension funds, mutual funds, and insurance companies. In return, firms can raise capital directly, allowing them to make riskier, long-term investments (
Didier and Schmukler 2013). In SSA countries, several reforms have also been made in the financial sector, highlighting financial liberalization and the emergence of foreign banks. However, the financial systems of this group of countries remain underdeveloped and dependent on banks (
Allen et al. 2014).
The selection of Sub-Saharan Africa and Latin America and Caribbean regions for our study is justified in several ways. First, although these groups of countries are located in different geographic regions, many of them have similar economic and social characteristics, namely strong heterogeneity in economic growth, excess natural resources, low levels of economic development, strong population growth, high rates of poverty, and unemployment (
Jungo et al. 2021;
De la Torre et al. 2018). Second, in both regions, a considerable number of adults remain without access to financial services and products (
Demirgüç-Kunt et al. 2018;
Mukherjee and Sood 2020). Third, the economic organization system in the two regions is rather dualistic and there is a strong interaction between the informal and the formal system (
Durango-Gutiérrez et al. 2021;
Fromentin 2018;
Gries et al. 2011). Finally, banks are the main financial institutions and deposits and loans are the main instruments of financial intermediation in SSA countries (
Allen et al. 2014), while for LAC countries the emergence of capital markets has made the financial system more comprehensive and complex (
Durango-Gutiérrez et al. 2021;
Fromentin 2018;
Gries et al. 2011;
De la Torre et al. 2018). Additionally, the financial systems of SSA countries are fundamentally dependent on banks, while the financial systems of LAC countries are more extensive and complex, due to the emergence of capital markets. Besides, the levels of financial inclusion in both regions are still very low, with only 43% of adults in SSA countries and 55% of adults in LAC countries having a bank account.
Financial inclusion is a policy goal present on almost every agenda, especially in emerging economies and developing countries (
Demirgüç-Kunt et al. 2018;
Mukherjee and Sood 2020). Access to a bank account is the main way forward in achieving financial inclusion (
Demirgüç-Kunt et al. 2018). Technological innovation, specifically the use of the cell phone in the financial system, has revolutionized financial access almost worldwide, reducing by about 35% the total number of adults (1.7 billion) without access to a bank account in the year 2017. From this perspective, the levels of financial inclusion in SSA countries evolved from 25% in 2011, to 34% in the year 2014, and to 43% in the year 2017. For LAC countries, technological innovation allowed growth of financial inclusion levels by 39%, 52%, and 55% in the years 2011, 2014, and 2017, respectively (
Demirgüç-Kunt et al. 2018). However, the great disparity in the levels of financial inclusion in the two regions constitutes another motivation for conducting the present study. Although the authors are aware of technological innovation’s importance in the current setting, there was not enough data on this matter for the period of analysis, justifying its removal from the data to be analyzed about financial inclusion proxies.
We aim with this study to assess the effect of financial inclusion and competitiveness on banks’ financial stability, considering the moderating role of financial regulation. Additionally, we compare the effects of these variables in SSA and LAC countries. Although studies assessing the effect of financial inclusion on financial stability have been growing, they are still rather inconclusive, and few studies consider the role of competitiveness and the moderating capacity of financial regulation. Moreover, we are unaware of any study that uses a comparative approach to assess the effect of financial inclusion on financial stability in realities with completely different stages of financial development (SSA and LAC). It becomes interesting to compare the results in different contexts, based on two fundamental assumptions: (1) different models may result in different responses (
Allen and Gale 2004); (2) banks act differently in different institutional and regulatory settings, implying that the results obtained for developed countries may not be applicable in developing or emerging countries (
Agoraki et al. 2011). Our results suggest that financial inclusion improves banks’ financial stability, higher competitiveness makes banks less stable, and financial regulation reduces the negative effect of competitiveness on financial stability. As for the practical implication of this study, we find that the use of a broad measure of financial inclusion to gauge the effect on financial stability in SSA countries is inaccurate and without any impact, while for LAC countries this measure produces positive and significant effects on financial stability. Regarding the policy implications, our results allow us to know and understand the relationship between financial inclusion, financial stability, and competitiveness in the banking sector, facilitating the implementation of financial inclusion programs, without compromising the stability of banks, since each context studied has its specific characteristics and needs. For example, for the SSA countries, financial inclusion related to the increase in credit and savings produces positive and significant effects on financial stability. On the contrary, in LAC countries the concern should be related to the geographic and demographic expansion of financial products and services in general, and to direct special attention to bank deposits, since reductions in bank deposits can contribute to bank fragility. This research suggests the application of measures that promote financial inclusion to foster financial stability in SSA and LAC countries.
This study contributes to the scarce empirical literature on economics and finance by considering the role of market structure in the relationship between financial inclusion and financial stability in two different samples, consisting of 46 countries from the SSA region and 31 countries from the LAC region, for the period 2005–2018.
The rest of the paper is organized as follows: a literature review follows in the next section, in the third section we describe the data and specify the models, in the fourth section we present and discuss the, and in the last section we conclude the study.
2. Literature Review
Feghali et al. (
2021) used an international sample consisting of over 140 countries and concluded that using a broad measure of financial inclusion is inaccurate in measuring the effect of inclusion on financial stability. In the same study, the authors found that financial inclusion measured as access to payment and savings accounts cause neutral or positive effects on financial stability, while credit expansion weakens stability. These results support the findings of the studies conducted by
Ahamed and Mallick (
2019) and
Han and Melecky (
2013) on different international samples and that of
Canlas et al. (
2018) on a sample from the Philippines. These authors concluded that financial inclusion through increased deposits contributes significantly to increased financial stability.
Morgan and Pontines (
2014) evidenced that increasing bank credit to small and medium-sized firms has positive effects on financial stability in an international sample. Contrary to this result,
Cihak et al. (
2016) evidenced that there is a negative correlation between financial inclusion and financial stability and concluded that there is a high possibility of a trade-off between financial inclusion and financial stability. However, the authors note that the impact of financial inclusion on stability is negative when it is related to credit expansion and positive when it is related to the expansion of deposits and savings. For the Asian region,
Vo et al. (
2021) used banking data and employed the Generalized Method of Moments (GMM) to estimate the effect of financial inclusion on financial stability, and showed that financial inclusion contributes positively to the increase of financial stability in the banking sector. They concluded that financial inclusion can help banks increase revenues, reduce costs and expand their market share. Analogous results for the Asian region were found earlier, in the study conducted by
Pham and Doan (
2020), when they employed the feasible generalized least squares (FGLS) estimator on the data of 42 countries in three separate years: 2011, 2014, and 2017.
Al-Smadi (
2018) also found that there are positive effects of financial inclusion on financial stability.
Regarding application in the modern banking industry,
Danisman and Tarazi (
2020), studied how financial inclusion affects financial stability in the financial system of the European Union and the results indicated that the advances of financial inclusion through digital accounts produce a stabilizing effect on the banking system. The scarce studies on the effect of financial inclusion on bank stability applied to the African continent by
Kouki (
2020) and
Musau et al. (
2018) also confirm the positive effects of financial inclusion on financial stability.
Competitiveness in the banking sector defines how financial services and products are diffused to customers; moreover, increased competitiveness improves the options available to customers and may induce banks to take more risks (
Feghali et al. 2021). Barriers to financial inclusion tend to be lower in countries with more competitive financial markets (
Zulkhibri 2016). It is no coincidence that authors such as
Mengistu and Saiz (
2018) and
Pham et al. (
2019) converge in the results of their studies when they found that competitiveness increases financial inclusion, through reduced financial costs and increased availability of financial products and services. Contrarily, the strong solidification of the bank in the market causes monopoly power, allowing high-interest rates to be set and consequently poor access to credit (
Albaity et al. 2019). Regarding the relationship between competitiveness and the financial stability of banks,
Albaity et al. (
2019) and
Goetz (
2018) showed in their studies that competitiveness is not responsible for the fragility of banks, whereas competitiveness reduces the risk behavior of banks and contributes to increased stability. While
Ahamed and Mallick (
2019),
Owen and Pereira (
2018), and
Petersen and Rajan (
2015) maintain in their studies that less competition in the banking sector can be favorable for financial inclusion and banking stability, when considering larger banks it is reported that these have the best capacity for credit availability and loan portfolio diversification, in addition to benefiting from economies of scale. Homogeneously,
Agoraki et al. (
2011) proffered that banks with market power tend to take lower credit risk and are more stable. Even so, we can note that the relationship between competitiveness and financial stability is inconclusive, highlighting
Allen and Gale’s (
2004) statement that the relationship between competitiveness and financial stability is complex. For the authors, sometimes competition increases competitiveness, and sometimes it does not, allowing them to conclude that there are contexts where concentration may be preferable. Regarding financial regulation,
Batuo et al. (
2018) confirmed that it can increase stability. Subsequently, authors such as
Anarfo et al. (
2020),
Damjanovic et al. (
2020),
Gupta and Kashiramka (
2020), and
Igan and Mirzaei (
2020) converge in their studies when they proffer that financial regulation increases bank resilience by improving asset quality, as well as inhibiting unsustainable bank credit growth and preventing financial instability. Contrarily,
Anarfo et al. (
2020) evidenced that financial regulation reduces financial inclusion in Sub-Saharan African countries.
Although the study of financial inclusion and its effect on bank stability has been growing, studies applied to SSA countries are still quite scarce and inconclusive. Besides, we are unaware of any study with this approach applied to LAC countries. Furthermore, in our study, we compared the behavior of bank-specific and macroeconomic variables in two different contexts and similar periods. Previous studies have not taken into consideration the role of market structure in the relationship between financial inclusion and financial stability. Specifically, competitiveness can enhance financial inclusion as well as increase the risk-taking behavior of banks, thus posing a threat to financial stability, hence the need to include financial regulation in the study as a measure to weigh the negative effects of competitiveness.
4. Results and Discussion
4.1. Descriptive Statistics
For the elaboration of descriptive statistics, we fragmented the variables under study into two groups. In
Table 3 we present the descriptive statistics of the indicators of financial inclusion and in
Table 4 we present the descriptive statistics of the bank’s specific variables and macroeconomic variables. We can see that, as for geographic penetration, there are on average 6.52 commercial banks and 11.02 ATMs per 1000 Km
2 in SSA countries and only 1.96 commercial banks and 2.76 ATMs in LAC countries. Regarding demographic penetration, it is noted that for every 100,000 adults there are on average 6.27 banks and 11.78 ATMs in SSA countries, and for LAC countries there are on average only 2.71 commercial banks for every 100,000 adults and 3.54 ATMs.
Descriptive statistics’ results also show that on average 320 adults in SSA countries have access to a bank account and in LAC countries only six adults have access to a bank account per 100,000 adults. During the period under review, users of banking services in SSA countries deposited in commercial banks on average 29.58% and saved on average about 13.21% of gross domestic product. In terms of access to credit, the financial system granted on average about 23.78% of gross domestic product. For LAC countries, adults deposited 6.65% and saved about 17.02% of the gross domestic product on average.
It can be concluded that the financial system of the SSA countries used, with greater relevance as a strategy for financial inclusion programs, the expansion of infrastructure, such as banks and ATMs. However, the financial system of LAC countries, to comply with financial inclusion programs, prioritize access to credit. Besides, on average, users of financial services in SSA countries save more than users in LAC countries.
On average, banks in LAC countries are more stable (15.89%), more profitable (15.25%), and assume less credit risk (4.11%), compared to SSA countries, though, the banking systems of SSA countries are on average more competitive than LAC’s banking systems. The regulation is on average stricter in the SSA countries compared to LAC countries. As for macroeconomic variables, the average inflation rate and the GDP per capita rate are higher in SSA countries.
4.2. Kaiser Factor Adequacy Test
The results of the Kaiser tests presented in
Table 5 suggest the use of the financial inclusion index in the analysis, since it presents a KMO value equal to 60% for the sample of SSA countries and approximately 60% for the sample of LAC countries. For more details see
Carillo et al. (
2019) and
Carvalho (
2013).
4.3. Correlation Matrix
The result of estimating the correlation of all variables under study, as well as only the main variables for samples from the SSA and LAC countries, are presented in
Appendix B,
Appendix C,
Appendix D, and
Appendix E, respectively.
Table 6 summarizes the correlation of our main variables of interest. The results suggest that there is a positive and weak correlation between financial inclusion and financial stability for the two samples. We can see that there is a weak and negative correlation between the financial inclusion and profitability of banks in LAC countries and nothing can be inferred for these variables in the SSA countries because there is no statistical significance. Moreover, we found a negative and weak correlation between financial inclusion and credit risk in the sample of SSA countries and there was no statistical significance among these variables in the LAC sample.
Regarding competitiveness, we found that there is a significant but negative correlation between competitiveness and financial stability, and competitiveness and credit risk, as well as a positive and significant correlation between competitiveness and profitability in the sample of SSA countries, whereas for the sample of LAC countries we only observe the negative correlation between competitiveness and profitability.
Financial regulation showed similar behavior in terms of correlation for the two samples, regarding its correlation with financial stability and credit risk, i.e., we found that there is a positive and significant weak correlation between financial regulation and financial stability, financial regulation, and credit risk. Similarly, we note the existence of a weak and negative correlation between financial regulation and the profitability of banks.
4.4. Unit Root Tests
To estimate the unit root we made use of the Fisher-Augmented Dickey-Fuller (Fisher-ADF) and Fisher-Phillip Perron (Fisher-PP) tests, which allow the measuring of stationarity in unbalanced panel data
2. The results of the unit root tests are presented in
Table 7.
When using panel data it is important to perform the stationarity test among the variables to avoid spurious regressions (
Breitung and Pesaran 2005;
Levin et al. 2002). The results suggest that all variables included in the study are zero-order integrated I(0), i.e., they are stationary.
4.5. Estimation of the Effect of Financial Inclusion on Financial Stability
This study aims to evaluate the effect of financial inclusion and competitiveness on financial stability, considering the moderating role of financial regulation, as well as to compare the achievements of these variables in the SSA and LAC countries.
Table 8 and
Table 9 show the results of estimating the effect of financial inclusion on financial stability in the SSA and LAC countries, respectively.
For SSA countries, the results suggest that the use of a broad measure of financial inclusion to measure its effect on stability is imprecise, as was the case in the study conducted by
Feghali et al. (
2021). However, financial inclusion related to the expansion of credit and savings has positive effects on financial stability. Similar results were found in the study conducted by
Morgan and Pontines (
2014) when they found that expanding credit to small businesses has positive effects on the stability of banks.
Contrarily, in LAC countries, the use of a broad measure of financial inclusion to assess its effect on stability is appropriate, as can be seen in
Table 9, i.e., the results suggest that financial inclusion improves financial stability. These results support the results found by
Al-Smadi (
2018),
Danisman and Tarazi (
2020),
Kouki (
2020), and
Pham and Doan (
2020). Interestingly, in LAC countries, when financial inclusion relates to the expansion of bank deposits, it produces negative effects on financial stability, results contrary to those presented by
Ahamed and Mallick (
2019),
Canlas et al. (
2018), and
Han and Melecky (
2013), which found that financial inclusion related to increased bank deposits increases the stability of banks.
Regarding competitiveness, the results suggest that it produces negative effects on financial stability and we cannot assess the effect of regulation on financial stability in SSA countries. However, financial regulation has positive effects on financial stability in LAC countries when we consider bank deposits as an indicator of financial inclusion. In addition, we show that the bank spread indicates that the high rate of bank loans and the low deposit rate is a factor that contributes significantly to the instability of SSA banks. This result is justified by the reduction of the financial capacity of users and especially when inflationary levels are high, therefore it is not by mere chance that the inflation rate negatively influences financial stability.
Furthermore,
Anarfo et al. (
2020) emphasize that the financial sector of African countries is characterized by high lending rates. Following these arguments, it is easy to conclude that in these countries spread is an important barrier to financial inclusion, high lending rates prevent agents from obtaining loans and low deposit rates prevent agents from depositing their savings.
Among the macroeconomic variables included in the study, inflation is the only one with a significant effect and has negative effects on financial stability in LAC countries. This result is justified by the fact that inflation represents an additional cost that reduces the purchasing power of agents and also reduces the ability of agents to honor their credit obligations (
Mengistu and Saiz 2018;
Song et al. 2021).
4.5.1. The Moderating Role of Financial Regulation
To measure the moderating role of financial regulation in the relationship between financial inclusion and competitiveness, we created the term of interaction between competitiveness and financial regulation (compreg). Afterward, we repeated the same estimates, introducing the new variable created, whose results are presented in
Table 10 and
Table 11, for SSA and LAC countries, respectively.
The results presented in the previous section confirm the negative effect of competitiveness on financial stability in the SSA and LAC countries, a result that contradicts the studies conducted by
Albaity et al. (
2019), and
Goetz (
2018), who showed that competitiveness reduces banks’ risk behavior and contributes to greater stability. Our results coincide with the exposures exhibited at
Allen and Gale (
2004),
Musau et al. (
2018), and
Owen and Pereira (
2018), who argue that competitiveness has negative effects on financial stability, by influencing banks to be keener to take risk, in order to obtain greater profit margin in the market.
The results presented in this section show that financial regulation moderates the effect of competitiveness on financial stability, i.e., the interaction between competitiveness and financial regulation has positive effects on financial stability, both in SSA countries and in LAC countries. This result can be based on the assumption that competition forces banks to share existing profits in the markets, and to obtain extra profits they have to increase the quality and quantity of financial services, as well as, less rigorously, in assessing the creditworthiness of customers, facts which can increase financial inclusion, as well as increase credit risk and instability (
Albaity et al. 2019;
Feghali et al. 2021;
Mengistu and Saiz 2018;
Pham and Doan 2020;
Pham et al. 2019;
Zulkhibri 2016).
However, financial regulation puts pressure on credit risk control and preservation of bank deposits, despite causing involuntary financial exclusion of customers with few guarantees of compliance. Financial regulation obliges banks to rationalize scarce resources by limiting the supply of loans only to customers who go through a rigorous credit assessment process, as well as influencing the increase in lending rates, given the scarcity of financial resources in the market. Thus, it can reduce competition and credit availability (
Anarfo et al. 2020;
Musau et al. 2018).
4.5.2. The Effect of Financial Inclusion on the Credit Risk and Profitability of Banks
Table 12 presents the results of estimating the effect of financial inclusion on credit risk and bank profitability in SSA and LAC countries, which suggest that financial inclusion produces different effects on credit risk and profitability in the two groups of countries, namely, financial inclusion significantly reduces credit risk in SSA countries and has a contrary effect on credit risk in LAC countries. Thus, we can make no conclusion regarding the effect of financial inclusion on profitability in SSA countries, since this variable did not present statistical significance. For LAC countries, the financial inclusion coefficient reveals a negative effect on banks’ profitability, which can be justified through the positive effect of financial inclusion on credit risk. Previous studies confirm that financial inclusion can have positive effects on credit risk if customers are well selected, or if they adapt loans according to customer needs (
Vo et al. 2021). On the contrary,
Kouki (
2020),
Kumar et al. (
2021), and
Musau et al. (
2018) showed that banks that offer more services and financial products have higher profitability and are more stable.
Competitiveness reduces credit risk and increases profitability in SSA countries, and for LAC countries competitiveness increases credit risk and significantly reduces bank profitability. Financial regulation increases credit risk in SSA countries and reduces credit risk in LAC countries. Financial regulation moderates the effect of competitiveness on credit risk and profitability in SSA countries. Therefore, for LAC countries financial regulation moderates only the effect of competitiveness on profitability. Authors such as
Ahamed and Mallick (
2019),
Albaity et al. (
2019),
Goetz (
2018), and
Igan and Mirzaei (
2020) confirmed in their studies that competitiveness increases banking stability. Unlike these results,
Feghali et al. (
2021),
Mengistu and Saiz (
2018), and
Pham and Doan (
2020) showed that competitiveness increases banks’ risky behavior. Associated with these results,
Anarfo et al. (
2020),
Batuo et al. (
2018), and
Gupta and Kashiramka (
2020) confirm that financial regulation reduces competitiveness in the banking sector, thus justifying the moderating role of financial regulation in the impact of competitiveness on credit risk and profitability of banks.
The size of the bank positively influences credit risk and reduces the profitability of banks in SSA and LAC countries. Larger banks are considered to be too big to fail and engage in very risky transactions, thus becoming too vulnerable to shocks (
Mohamad and Jenkins 2020;
Petersen and Rajan 2015).
The most inefficient banks assume greater credit risk and consequently their profits reduce, as is the case of banks in SSA countries, while for LAC countries bank inefficiency also drives greater assumption of credit risks and this has influenced the increase in the profits of these banks. These results are in line with those presented by
Liu et al. (
2020) and
Yang and Zhang (
2020).
Even so, there is nothing we can measure concerning the effect of macroeconomic variables on credit risk and bank profitability for these two groups of countries.
5. Conclusions and Policy Implications
Banks play a very relevant role in the effectiveness of financial inclusion programs, mainly because they are the main providers of financial services and products in any economy (
Anarfo et al. 2020;
Musau et al. 2018). For banks to efficiently perform their role as a financial intermediary, they must be financially stable (
Musau et al. 2018). Thus, policymakers in developing countries have privileged in their agendas measures that contribute to increased financial stability and financial development (
Beck 2008;
Emara and El Said 2021;
Zulkhibri 2016). Certainly, financial inclusion is one of these measures. Any economy that aims to achieve financial development and inclusive economic growth must strike a balance between financial inclusion and stability, as a higher priority given to only one component can stifle the other (
Musau et al. 2018). This study aimed to assess the effect of financial inclusion and competitiveness on banks’ financial stability, considering the moderating role of financial regulation. To do so, we compared the effects of these variables in Sub-Saharan African (SSA) and Latin American and Caribbean (LAC) countries. Our results suggest that inclusion enhances bank stability in SSA and LAC countries, financial regulation contributes to increasing financial stability in LAC countries, while we find no statistical significance in the effect of financial regulation on financial stability in SSA countries. Moreover, competitiveness negatively affects financial stability, and financial regulation moderates the negative effect of competitiveness on financial stability in SSA and LAC countries. We also found that financial inclusion reduces credit risk in SSA countries, and for LAC countries financial inclusion increases credit risk and reduces bank profitability.
The use of a broad measure of financial inclusion constructed through principal component analysis in the context of African countries does not produce any effect on financial stability in SSA countries, so financial inclusion related to bank credit expansion and savings produces positive effects on stability. For LAC countries, the financial inclusion index has positive impacts on financial stability, suggesting that all aspects related to financial inclusion, emphasizing geographic and demographic penetration, should be considered for the financial inclusion measure to convey positive effects on financial stability. As well, a reduction in bank deposits may weaken financial stability.
Regarding the practical and policy implications of this study, the results suggest that increases in the levels of financial inclusion in the SSA and LAC regions will be favorable for households, who will have equitable opportunities to obtain financing, and that increased financial inclusion is a relevant factor in achieving financial stability for banks. These results allow policymakers designing financial inclusion implementation strategies to know and understand the effect of inclusion on financial stability and to apply it according to the specific needs of each region.
Notwithstanding, this study has some limitations, which may be transformed into valuable suggestions for future work. First, the study should include all the countries of these regions and others to present a comparative study and to allow a broader range of applications. For this, more data has to be available, which is not the case at the present moment. Second, the period of analysis should be expanded, which was also not possible considering data availability. Finally, other financial inclusion measures such as cell phone use to access bank services could be included in the created index as more data becomes available, which was not possible at the present due to missing data and unavailability, although the authors recognize this to be an important variable to be included in future.