The Mutually-Supportive Relationship Between Financial Inclusion and Financial Stability

This note is the first in a new publication series titled AFI Viewpoints, which shares critical knowledge on financial inclusion policymaking and implementation from the Alliance for Financial Inclusion (AFI) membership. The note defines financial inclusion, throws light on the direct and indirect impacts of financial inclusion on financial stability, and also discusses the feedback effects of how financial stability leads to financial inclusion. Key points include:

• Financial inclusion promotes more diversified funding and loan bases;
• Appeal of potentially unstable savings channels is diminished by financial inclusion;
• Greater political legitimacy can be achieved through a more inclusive financial sector;
• Financial inclusion promotes financial stability at the household level and greater income equality, thereby fostering financial stability;
• Higher level of stability in a formal financial sector will be a more attractive option for the unbanked. This is because financial institutions can then afford to reduce fees for everyday transactions and accounts, bringing financial services into the realm of affordability for many people.

The note concludes that for the right kind of financial inclusion to exist that supports financial stability, products must be tailored carefully to people?s needs, at a reasonable cost, and that they cannot be overloaded with financial services that they do not need or want.