Financial Inclusion–Financial Stability Nexus in Arab Countries: Evidence from 2011–2021

Abstract

his study examines the impact of financial inclusion on financial stability in Arab countries over the period 2011–2021, employing static panel data models. Financial inclusion is captured through five key indicators: ATMs per 100,000 adults, commercial bank branches per 100,000 adults, borrowers from commercial banks per 1,000 adults, broad money supply (% of GDP), and domestic credit to the private sector (% of GDP). Financial stability is proxied by the Z-score.

Empirical analysis indicates that the random effects model provides the most appropriate specification, with the Feasible Generalized Least Squares (FGLS) method applied to address autocorrelation and heteroskedasticity. Results reveal that the number of bank branches and borrowers from commercial banks positively and significantly influence financial stability, whereas the number of ATMs has a negative and insignificant effect. Broad money supply negatively impacts stability, while domestic credit to the private sector shows a positive but statistically insignificant effect

The study highlights that advancing financial inclusion is a crucial driver of financial stability in the Arab region. Policy implications include establishing robust inclusion frameworks, integrating inclusion with stability strategies, strengthening the legal and regulatory environment, expanding banking networks in underserved areas, and avoiding excessive credit growth to mitigate financial risks.