The Impact Of Financial Inclusion On Financial Stability In Arab Countries

Abstract

This paper intends to explore the relationship between financial inclusion and financial stability under the scope of Arab economies. The linkage will be thoroughly investigated with z-score index and financial inclusion. Inclusive financial system is assessed by two dimensions: usage of financial services and access to the financial system. Using panel data of 2004-2020, this study empirically investigated whether financial inclusion contribution to country’s financial stability measured by z-score. We apply fixed effects regression and random effects regression to capture the impacts of financial inclusion upon financial stability. To enhance the robustness of the model, the Feasible Generalized Least Squares (FGLS) regression is therefore adopted as the solution for the random effects regression. Robust results obtained from FGLS model show that financial inclusion variables measured by number of ATM’s, CBB, DAC and LAC have mixedeffects on financial stability. GDP, M2 and OP are introduced to the model as control variables. The findings exhibit an overall weak positive/ negative influence of financial inclusion on financial stability in Arab countries