Financial Stability and Financial Inclusion: The Case of Sme Lending

Developing economies are seeking to promote financial inclusion, i.e., greater access to financial services for low-income households and firms. This raises the question of whether greater financial inclusion tends to increase or decrease financial stability. A number of studies have suggested both positive and negative impacts on financial stability, but very few empirical studies have been made. This study focuses on the implications of greater financial inclusion for small and medium-sized enterprises (SMEs) for financial stability. It estimates the effects of measures of the share of bank lending to SMEs on two measures of financial stability — bank nonperforming loans and bank Z scores. We find some evidence that an increased share of lending to SMEs aids financial stability by reducing non-performing loans (NPLs) and the probability of default by financial institutions.