Financial inclusion, economic freedom and financial stability in sub-Saharan Africa

Abstract

Executive Summary

The study examines the role of economic freedom in the relationship between financial inclusion and stability in sub-Saharan African economies. By employing the System General Method of Moment and data from 39 sub-Saharan African countries between 2004 and 2017, the study examines whether economic freedom (i.e., financial and business freedom) conditions the effect of financial inclusion on stability. Results from the study show evidence of a positive impact of financial inclusion on financial stability in sub-Saharan African economies. Again, the results depict that financial inclusion could better enhance financial stability in economies with a high level of economic freedom (i.e., financial and business freedom). The results suggest that policymakers should allow financial institutions to operate with the level of freedom required to provide services at the lowest possible price. Further, it is recommended that policymakers should ensure that administrative requirements are minimal, bureaucracy costs are lesser, and licensing regulations for startups and expansion of existing firms are friendly. With this, associated increases in business and financial freedom would have promising implications for the relationship between financial inclusion and stability.

Managerial Implications of the Study

This research is very vital for firms in both the financial and nonfinancial. Specifically, managers of firms in the financial sector can embrace the level of financial freedom that would be allowed by the government, to come up with new and inclusive financial products, while putting in measures not to endanger the stability of the financial sector. Managers in the business sector could also take advantage of the business freedom that would be allowed by the government to diversify business operations, increase profitability and avoid causing nonperforming loan problems to banks.

Originality/Value

The study provides the first insight into how economic institutions condition the effect of financial inclusion on financial stability, which has not been previously studied.