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The relationship between financial inclusion and financial stability

An article from the May 2023 Financial Stability Report.

Tom Bayliss and Chris Leaney

The relationship between financial inclusion and financial stability
The relationship between financial inclusion and financial stability

An article from the May 2023 Financial Stability Report.

Our regulatory functions aim to protect and promote the stability of New Zealand’s financial system. In doing so we must have regard to factors set out in the Financial Policy Remit, including financial inclusion.1

This deep dive explores the relationship between financial stability and inclusion, what we can learn from other central banks, and next steps for us.

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Inclusion initiatives by central banks

Central banks around the world, including us, continue to contribute to inclusion through various initiatives. These include:

  • delivering inclusive payment systems,
  • factoring inclusion into regulatory settings,
  • collaborating with public and private networks,
  • delivering financial literacy programmes, and
  • undertaking research to fill evidence gaps.2

However, central banks are mindful of the implications of improving inclusion, including those relating to stability.

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The relationship between inclusion and stability

Inclusion and stability are interconnected. A well-functioning financial system with low probability of insurers and deposit-takers getting into trouble increases the likelihood that people can access, and have trust in, the products and services they rely on.3

In an unstable environment, entities could collapse and credit access could be limited, reducing options for customers. Similarly, keeping inflation low and predictable promotes a more stable economy, reduces future uncertainty, and provides greater opportunities for everyone to participate.

Inclusion can also contribute to stability. Since 2016, for instance, the 9 largest providers in the United Kingdom have been legally required to offer basic bank accounts, which has contributed to inclusion and acted as a stepping stone for people to access further banking services.4

Reducing the unbanked population helps grow the balance sheet of the formal financial sector, and broadens the base of low income savers and borrowers who often maintain steady depositing habits.5

In addition, inclusion efforts to increase lending to smaller firms can help to diversify asset portfolios and reduce the relative size of any single borrower.

A review of 2,600 banks in 86 countries from 2004 to 2012 found a higher level of inclusion contributes to greater bank stability, particularly in countries with strong institutions and sound regulatory settings.6

However, ambiguity remains in the empirical literature around the relative strength and direction of causation between inclusion and stability. There are instances where increasing inclusion can negatively impact stability, for example, extending access to credit for marginal borrowers could result in financial institutions taking on a greater degree of risk as seen during the subprime mortgage crisis in the United States.7

The Bank for International Settlements has found that in India, providers such as micro-finance institutions (non-bank deposit-takers in the New Zealand context) and Regional Rural Banks that are geared to meet the needs of their regions and under-served communities can face greater challenges with connected lending, poor governance and geographic concentration, increasing their exposure to downturns and natural disasters.8

In New Zealand, the collapse of finance companies such as South Canterbury Finance in 2009 highlights how institutions that support inclusion (for example, through small business financing) in their communities can also pose a risk to stability if lending standards are undermined.9

3 important factors to consider when optimising inclusion and stability are:

  • the types of products and services affected,
  • the size and scale of affected groups, and
  • whether inclusion efforts could lead to a reduction in lending standards.

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Considerations for RBNZ

There are areas where we can deliver positive outcomes for stability and inclusion. Under the new upcoming Deposit-Takers legislation, we will think carefully about creating rules that are appropriate to the characteristics and soundness of deposit-taking entities. The extent to which certain deposit takers provide access to financial services for specific customers could be a relevant factor in how a proportionate approach is applied in the calibration of prudential requirements. 

We also have regard to inclusion and stability in our work to improve Māori access to capital. The issues paper we developed in 2022 highlighted barriers that Māori firms face when seeking finance, which undermine inclusion and constrain the growth and diversity of our economy.10

We are now working collaboratively with retail banks to support the development of solutions for:

  • lending on whenua Māori, which has the potential to improve access to capital for Māori landowners and collectives; and
  • data related to Māori access to capital, which could be a first step in financial inclusion indicators that sit alongside financial stability measures.

We will continue to explore connections between inclusion and stability as we develop our inaugural Financial Inclusion Strategy. We will also continue to collaborate and co-ordinate efforts with external stakeholders including the Council of Financial Regulators, for which ‘Financial Inclusion’ is 1 of 5 priority themes.


1  World Bank, Financial Inclusion Overview (

2  Alliance for Financial Inclusion (2022), National Financial Inclusion Strategies: Current State of Practice (

3  Bank of International Settlements (2016), IFC Report on measures of financial inclusion – a central bank perspective (

4  HM Treasury (2022), Financial Inclusion Report (

5  Address by H R Khan (2011), Financial inclusion and financial stability: are they two sides of the same coin? (

6  Sussex Research Online (2017), Is financial inclusion good for bank stability? (

7  World Bank (2016), The Nexus of financial inclusion and stability: Implications for holistic financial policy-making (

8  Address by H R Khan (2011), Financial inclusion and financial stability: are they two sides of the same coin? (

9  New Zealand Parliament (2019), House of Representatives - Inquiry into finance company failures

10  The Reserve Bank of New Zealand, Improved Maori Access to Capital Issues Paper