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1. Introduction
Since the early 2000s, the term “financial inclusion” has been gaining popularity among academicians and policymakers. This is mainly due to the research evidences that financial exclusion has a direct effect on poverty reduction and economic development (Shiimi, 2010). Many studies have been pointing out that financial inclusion be emphasized in development policy issues. Low-income people having access to a diverse set of financial tools have far higher capacity to improve or stabilize their income, acquire assets and strengthen their resilience to economic shocks (WSBI, 2010).
In addition, by investing funds properly, managing risks and efficient allocation of resources, these financial policies have a significant impact on the economic growth of a country (Schumpeter, 1911; Goldsmith, 1969; King and Levine, 1993). Besides economic growth, previous finance literature suggests that improved access to finance has benefited different socioeconomic variables. Better access to finance, in particular, boosts savings (Aportela, 1999); increases economic growth (Sethi and Sethy, 2018; Sethi and Acharya, 2018); decreases income inequality, poverty and gender inequities (Burgess and Pande, 2005a; Chibba, 2009; Kim, 2016); and improves general human development (Burgess and Pande, 2005a; Chibba, 2009; Kim, 2016). However, it has been recognized that a significant expansion of financial systems may pose a danger to the banking sector’s vulnerability and create different liquidity exposure issues. The world economy has seen multiple financial crises in recent decades because of this excessive banking expansion without sufficient supervision (Laeven and Valencia, 2013).The basic goal of financial inclusion has always been to provide simple and affordable cost of financial services to the unbanked poor and underprivileged people in the society.
Financial inclusion facilities can reduce financial fragility, and this could lead to financial stability (Ghosh, 2008). This suggests that financial inclusion can be one of the sources of financial stability via various socioeconomic variables. Similarly, researchers have suggested that financial inclusion has a positive impact on financial stability. It is argued that improved financial inclusion can improve the saving and deposit capacity of people (Hawkins, 2006; Hanning and Jansen, 2010; Cull et al., 2012). In this context, one concern raised by policymakers is that does this expansion of the level of financial inclusion to the poor and marginalized groups of society endanger the countries’ financial stability, particularly...