Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?

Since financial inclusion is a multidimensional concept, its macroeconomic effects depend on its nature. This paper from the IMF examines the linkages of financial inclusion with economic growth, financial and economic stability, and inequality; it offers three key policy-relevant findings. First, financial inclusion increases economic growth up to a point. Greater access of firms and households to various banking services, as well as increasing women users of these services, lead to higher growth. Further, sectors dependent on external finance grow more rapidly in countries with greater financial inclusion. However, the marginal benefits for growth wane as both inclusion and depth increase. As such, these benefits could be low, and even negative, for some advanced economies. Second, new evidence shows that financial stability risks increase when access to credit is expanded without proper supervision. Financial buffers decline with broader access to credit, other things being equal. In countries with weaker supervision, the erosion of buffers is larger. On the other hand, countries with strong supervision could see some financial stability gains from higher inclusion. The paper also reveals large supervisory gaps across countries, signaling the potential risks to financial stability from an unchecked broadening of access to credit. And finally, in contrast to credit access, increasing other types of access to financial services does not impact financial stability adversely. Increasing access to automated teller machines (ATMs), branches, and transaction accounts fall in this category. Moreover, closing gender gaps in account usage and promoting diversity in the depositor base would help to improve growth without impairing financial stability. Therefore, these services can be promoted extensively, from a financial stability perspective. Overall, financial inclusion can meet multiple macroeconomic goals, but macroeconomic gains wane as both financial inclusion and depth increase, and there are trade-offs with financial stability.