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Nexus of financial inclusion, competition, concentration and financial stability

Nexus of financial inclusion, competition, concentration and financial stability 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/approachTo 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.FindingsThe 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/implicationsFinancial 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/valueTo 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Competitiveness Review Emerald Publishing

Nexus of financial inclusion, competition, concentration and financial stability

Competitiveness Review , Volume 31 (4): 24 – May 25, 2021

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References (77)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1059-5422
DOI
10.1108/cr-12-2019-0136
Publisher site
See Article on Publisher Site

Abstract

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/approachTo 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.FindingsThe 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/implicationsFinancial 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/valueTo 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.

Journal

Competitiveness ReviewEmerald Publishing

Published: May 25, 2021

Keywords: Principal component analysis; Competition; Concentration; Financial stability; Financial inclusion indices; System-GMM; G18; G21; G28

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